The Use Tax Mess in California

I’ve often wondered, how do you make the Franchise Tax Board (California’s income tax agency) look good? Well, I and other California tax professionals have discovered the answer: Have the Board of Equalization implement a program that had such a poor design that the FTB looks good in comparison. That program is the mandatory Use Tax registration for California businesses.

Use Tax is the equivalent of sales tax for products where sales tax isn’t collected. Let’s say you buy a $10 book from Amazon won’t collect sales tax in California (they do not have a nexus in California); you are supposed to remit the $0.88 in sales tax yourself. Most individuals don’t, of course.

The California legislature decided to force more businesses to comply with the law. Mandatory registration was enacted for any business entity (Schedule C, Schedule E, LLC, LLP, S-Corporation, Corporation, Trust, and Tax Exempt Organization) with $100,000 or more in revenues in 2007, 2008, or any year ongoing that has not had to register with the BOE (generally, businesses that had no sales tax collection requirement). The BOE sent out letters in September and October to businesses they found ordering them to register and file Use Tax Returns for 2007, 2008 and all future years.

To say the BOE was unprepared for this would be kind. At tonight’s Orange County Enrolled Agents meeting, one practitioner noted that she duly registered last October, filed her 2007 and 2008 Use Tax Returns and paid $36 in use tax, only to receive, “The nastiest letter I’ve ever received from any tax agency in my career. It threatened me, my business; I’m surprised they didn’t threaten to take my first born!” After a few back and forth letters, her situation was resolved.

However, most entities impacted by this haven’t bothered to do anything. Adding to the misery for tax professionals are the deadlines. The forms are due on April 15th. Now can we think of anything else that might be due on April 15th?

The BOE will on March 1st send out log-in codes and usernames to a web site where the returns can be filed. As Lynn Freer (the head of Spidell) said tonight, “Option A, the client will throw the letter away. Option B, they’ll bring it to you next year. Option C, they’ll tell you about it in August. Option D, they’ll bring it to you to do with their tax returns.”

Even better are those businesses who reach the $100,000 threshold in 2009. They must register in March, and likely wait six weeks to file their returns (that’s how long the BOE is taking to process the registration forms). Or they can go to their local BOE office except that those office personnel haven’t been trained yet.

Another joy is the penalty situation. You can get penalties abated (primarily for 2007 and 2008) automatically…except you must mail the request to the BOE.

There’s only one way to describe this: FUBAR. Lynn Freer and Spidell are spearheading an attempt to delay the due date until October 15th. (Here’s a link to a Word document explaining why this is a good idea.) Hopefully this won’t be as big a mess as I think it will be.

Finally, my compliments to State Senator Ron Calderon (D-Montebello). When asked by Lynn Freer about the legislation his office said it was wonderful as designed and the due date doesn’t need to be changed. If Senator Calderon spoke to his tax professional he’d learn how wrong he really is.

Tags: ,

3 Responses to “The Use Tax Mess in California”

  1. […] Last night I wrote about California’s messed up implementation of new Use Tax reporting requir…. I forgot the best (or worst) part of the fiasco. […]

  2. […] The make use of taxation disaster in California […]

  3. […] my first client received his Use Tax Enrollment Letter. At least this client managed to ask me if they had to do anything with it. The letter, dated March […]