January 10, 2007

This year all California tax preparation clients will be asked if they made out-of-state purchases in 2006. This is because California residents who purchase merchandise from vendors located outside the state or the country may owe California use tax. This includes purchases made over the Internet.

Use tax can be paid with the filing of your California income tax return or by filling out a Use Tax Return, found in Publication 79B from the Board of Equalization.

Why use tax and why now?

The use tax is intended to protect California merchants who otherwise would be at a competitive disadvantage when out-of-state vendors make sales to California customers without charging tax.

With the advent of Internet shopping and an increase in people buying from mail-order businesses, California state and local governments have experienced a loss of sales tax revenue. Use tax is not new, but awareness of it is still relatively low.

The state has created a campaign to educate people and is starting to actively pursue people who don’t pay use tax. I have been mentioning use tax to most clients for a number of years now and hope the information in this message will make it more understandable.

What is use tax?

Use tax is like sales tax, but you pay it directly to the state, rather than to the retailer. The rule of thumb is that you owe use tax if (1) you bought something that would have been subject to sales tax if purchased at a local store and (2) you didn’t pay sales tax at the time of purchase. You generally owe California use tax when you use, store or consume – in California – tangible personal property purchased from an out-of-state vendor. If the vendor does not collect California tax on the purchase, the purchaser must pay the tax directly to the state. If you don’t report and pay your use tax in a timely manner, such as with your income tax return, the state will assess penalties and interest.

What is and is not subject to sales and use tax can be complicated. There are numerous exceptions to the rules, but here are some common ways that people make out-of-state purchases that are subject to use tax:

· Internet purchases
· Foreign purchases
· Shopping channel purchases
· Mail-order purchases

These are some common examples of items subject to use tax:

· Clothing
· CDs and books
· Computers, cameras and other electronic equipment
· Toys
· Household items such as small appliances
· Makeup
· Over-the-counter medications
· Collectibles
· Jewelry
· Sports equipment
· Computer programs shipped on a disc

Items that are exempt from sales tax are also exempt from use tax. Here are a few examples:

· Music and other online media purchased for your iPod or MP3 player and transferred directly over the Internet,
· Software that is transferred over the Internet where nothing is mailed to you,
· Prescription drugs,
· Newspapers, magazines and other periodicals,
· Most food items, and
· Purchases where the seller added California sales tax to your purchase.

What if sales tax was paid to another state?

If you are required to pay, and did pay, another state’s sales tax on the purchase, you may be able to take a credit against the California use tax due. If, for example, you paid 7% sales tax to another state, you are only required to pay the difference between the 7% and your county’s rate (8.75% in Alameda County).

New Rules For Charitable Deductions

Due to recent legislation, the IRS is tightening up rules for charitable contributions. Please read below and learn how to protect your deductions.

Effective for 2007: Make sure you have a bank record or receipt for every monetary donation you make. Starting this year, donations will not be deductible without a canceled check, bank statement, credit card statement, or a receipt/letter from the organization showing the date and amount of the donation.

This new requirement particularly affects cash donations normally made to churches, schools, Salvation Army bell ringers, etc. To preserve your deduction it's better to write a check or put the donation on a credit card. If you still give cash, be sure to get an acknowledgement from the organization. Without a letter or receipt, your cash donations will not be deductible on your 2007 income tax return.

(Note that prior law still requires a written acknowledgement for all contributions of $250 or more.)

Effective as of 8/17/2006: Noncash donations must be better documented and donated items must be in good used condition (except for high value items with an appraisal). No deduction will be allowed for items of minimal value such as used socks and undergarments.

You already know the necessity of a receipt for your donations to the Goodwill, St. Vincent, etc. What's changing is that now you need to write a much better description of the donated items on the receipt or on a separate piece of paper. Listing "three bags of clothing," for example, is no longer sufficient. Be sure to document the type and amount of clothing and household goods you donate.

The IRS believes there is abuse in the area of noncash charitable contributions. To avoid losing this legitimate deduction, take the extra time to document before your drop off.

Use Tax continued....

How do you pay the use tax?

If you are a retailer yourself and have a California resale permit, you pay use tax with the filing of your sales tax returns.

However, most of us must either:

· Pay the use tax on our California income tax return,

or

· Fill out the Use Tax Return found in Publication 79B and mail it to the Board of Equalization.

The last word

I will discuss use tax with clients this year and have Publication 79B on hand for those who choose to report it separately. To include it on your state income tax return, please provide me with the total dollar value of your 2006 out-of-state purchases at tax time.

I really hate bringing you unwelcome tax news. (One of my professional crosses to bear!) In prior years, blissfully ignorant of use tax, I enjoyed opportunities to make purchases free of sales tax.

It is not good to remain ignorant, however, as the state is unhappy with the level of "voluntary compliance" where use tax is concerned. I don't know what kind of enforcement methods they will come up with, but they are looking in that direction.

Nowadays they know that most of us have purchased something free of sales tax during the year (bought anything from Amazon lately?) and so I will be encouraging clients to report use tax on their 2006 state income tax returns.

Yours,

Alison

P.S. I recommend reading Publication 79B for further information. You can also call the BOE Information Center at 800-400-7115.