Taxing issues: do your clients pay use tax?

• Author: Allen, Bruce C.
• Position: Governmentrelations

CalCPA's Committee on Taxation identified issues with AB 969 (Eng) requiring individuals to pay use tax obligations with their California individual income tax return.

Taxpayers are required to file and pay the use tax to the California Board of Equalization on the last day of the month following the quarterly period when the purchase was made. Alternatively, the use tax due can be voluntarily paid with their individual California return.

There is a separate line on Page 2 of Form 540 asking for the amount of use tax due. The requirement that a line for payment of use tax be included on state tax forms is due to sunset Jan. 1, 2009.

AB 969 would eliminate the sunset and mandate that all taxpayers who have not already filed the required use tax return with the BOE to pay the tax with their personal income tax return. Failing to comply will subject taxpayers to a 10 percent penalty, plus interest, which is consistent with current law.

AB 969 would be effective Jan. 1, 2008, for purchases made in 2007. The COT has concerns relative to some of the bill's language that arises when income tax and sales/use taxes become intertwined.

According to the bill's author, "Currently, if consumers fail to report their use tax liability directly to the Board, they can 'elect' to report their liability on their income tax returns. The term 'elect,' however, is misleading and adds to the misconception that reporting use tax liabilities on income tax returns is optional."

The thought is, by clarifying that taxpayers are required to report use tax liabilities on their income tax returns after failing to pay the BOE directly will enable tax practitioners and taxpayers to have a better understanding of their obligation to properly report use tax liabilities.

According to a legislative analysis of the bill, "The Franchise Tax Board analyzed data on use tax payments reported on personal income tax returns. In 2003, the FTB discovered that 63 percent of all individual returns were practitioner-prepared, yet only 16.6 percent of all use tax declarations were made on practitioner-prepared returns. Individuals who self-prepared were nearly eight times more likely to declare use tax than those who used a tax practitioner. One possible explanation for this is that payment of the use tax on an income tax return is voluntarily."

Unstated is the assumption that tax practitioners may be failing to ask their clients about purchases subject to use tax. The BOE estimates that...