Now that the State is requiring service businesses with annual gross receipts of $100,000 or more to register for use tax, it’s important to know what is and isn’t taxable. Typically, use tax applies to property purchased from out of state vendors. Following are some of the common exemptions from this tax:

1. Occasional sales- If the purchase is from an occasional seller the purchaser is not subject to sales or use tax. An occasional seller is a person who is not engaged in business and who makes less than 3 sales in a 12 month period. For example, I was involved in an audit of a Printer who was assessed use tax on an out of state purchase of a printing press. Under normal circumstances, this would have been a taxable transaction. In this case, however, the out of state printer (seller) went out of business over 12 months prior and liquidated his last piece of equipment. When looking back 12 months, he had no other sales, hence he met the definition of an occasional seller. Thus the purchase by the CA business was not subject to use tax.

Note- purchases of vehicle vessels and aircraft do not get this exemption.

2. Tangible property- The common exemption here is purchases of software that are electronically transferred (downloaded.) Be sure no original disk is transferred. Also in this category is intellectual property purchases.

3. Storage and use exclusion- If property is purchased from out of state and stored in CA for the purpose of transporting it outside the state for use thereafter solely outside the state, it is exempt.

4. 90 day rule- Property purchased outside the state and brought into CA within 90 days after its purchase is subject to use tax. If the property is used out of state for 91 days prior to bringing it back to Ca it is exempt. When counting the 91 days, don’t count storage or transport time.

5. 6 month rule- If after entering California, the property is subsequently transferred out of state for storage or use and kept out of state for more than half the time during the next six month period immediately following its entry into this state, it is exempt. This rule is used if you flunk the 90 day test (i.e. property is brought into Ca within 90 days).

6. 12 month rule-If the property is a vehicle, vessel or an aircraft the 90 day rule changes to a 12 month rule for CA residents.

7. Other special exemptions- Other special exemptions exist for commercial uses of vehicles, vessels, aircraft that enter the state within 12 months.

8. Purchases made in CA that are subject to sales tax. Remember, if a purchase is made in CA and no sales tax is charged, the buyer is under no obligation to accrue use tax, unless a resale or some other exemption certificate was issued by the buyer to the seller.

9. Construction contracts- Improvements made to real estate are not subject to use tax. Recently, one of my non permitized clients, a private prep school, received an inquiry from the BOE asking for a listing of all their assets purchased in the past three years. We provided the depreciation schedule which showed a significant amount for artificial turf. The auditor wanted to see the invoices which were all from an out of state company with no tax change. Of course, he immediately thought, use tax! The invoices were for progress payments of a construction contract for materials and labor. Because the job was pursuant to a lump sum contract to furnish and install materials, the contractor has the liability, not the purchaser. If the materials would have been purchased separately and another company was hired to install it, the material portion would have been taxable.

These are some of the common exemptions from use tax that apply to most businesses including service businesses like CPAs, attorneys, EA’s, tax preparers, etc.