Another Tax on Small Business

Do you know about this one?

by Peter Girolamo, C.P.A., M.B.A.

Everybody knows what sales tax is, but did you know sales tax has a sibling known as use tax?

In my CPA practice I often get the following question from my small business clients: “When I buy something over the internet from an out-of-state vendor, I don’t have to pay sales tax, right?” Technically that is correct, at least here in California. You don’t have to pay sales tax. But if you use, consume or store that item in the state, you will be subject to use tax.

What is use tax, and how does it differ from sales tax?

Sales tax and use tax are really the same thing. What differentiates the two is the location of the seller of the merchandise. According to the California State Board of Equalization: “The California sales tax is imposed on all California retailers. It applies to all retail sales of tangible personal property in the state” and “The California use tax is imposed on consumers of tangible personal property that is used, consumed, or stored in this state. Use tax applies to purchases from out-of-state vendors that are not required to collect tax on their sales. Use tax also applies to most leases of tangible personal property.”

Some out of state vendors collect California sales tax, especially if they have a place of business in California. When sales tax is paid, use tax does not apply.

How does it work?

You will need to keep track of your out of state purchases that are subject to use tax (per the definition above) and include the value of those purchases on your sales and use tax form that you file with the Board of Equalization.

If you resell some of these purchases and use some of them for your own purposes, you will need to keep a tally of the purchases consumed or used by you in your business (not resold) and report them as purchases subject to use tax. Purchases held in inventory for resale are not subject to use tax.

Are all self-consumed purchases subject to use tax?

No, some purchases are exempt from use tax, as well as sales tax. This link will give you information on items that are exempt or excluded from sales and use tax:

Additional information on California use tax is available through the State Board of Equalization at

Peter Girolamo, CPA specializes in bookkeeping, payroll, tax services and related advice for small businesses and their owners. His office is located in Thousand Oaks California, but he serves clients in several states. Peter can be reached or by phone at 805-778-9277.