What Is California Use Tax and When Do You Owe It?
Explains use tax as California's mechanism for collecting sales tax on purchases where no sales tax was charged at the point of sale — same rate as sales tax, paid directly by the buyer.
Use tax is California's way of collecting sales tax on purchases where no one collected it from you at the time of sale. If you bought taxable goods from an out-of-state or online seller who didn't charge California sales tax, you likely owe use tax on that purchase.
How Use Tax Works
When you buy taxable physical goods and the seller doesn't collect California sales tax, California still expects to receive that tax, you just pay it directly rather than through the seller.
Use tax rate = same as California sales tax (7.25% base + any applicable district taxes where you're located)
The logic is straightforward: whether you buy something from a California retailer or order it from a seller in another state, California expects the same tax to be paid. Use tax closes the gap when sales tax wasn't collected.
Common Situations Where You Owe Use Tax
- You order supplies, equipment, or merchandise from an online retailer who doesn't charge California sales tax
- You attend a trade show or buy goods in another state and bring them back to California for business use
- You purchase from a foreign vendor who doesn't collect California tax
- You buy taxable items from a small seller or individual who isn't registered to collect sales tax
Use tax does not apply to services. Since services are generally not taxable in California, buying a service from an out-of-state provider does not trigger use tax.
What You Need to Track
To calculate and report use tax accurately, you need to track:
- The purchase price of taxable goods where no California sales tax was charged
- The vendor and date of purchase
- Confirmation that California sales tax was not collected (this is usually evident from the invoice, if there's no California sales tax line, you likely owe use tax)
Your NCO bookkeeper can flag these transactions as they appear in your records.
How to Pay Use Tax
If your business is registered with the CDTFA (has a Seller's Permit):
You report and pay use tax directly on your regular sales tax return. There is a line on the return specifically for use tax owed.
If your business is not registered with the CDTFA:
You report and pay use tax on your California business income tax return (for entities) or your California personal income tax return (for sole proprietors and individuals).
The CDTFA also has a use tax lookup tool at cdtfa.ca.gov if you want to confirm the rate for your location.
Abnormal Procedures
You've been buying taxable goods online for years and never paid use tax.
You may have accumulated a use tax liability. California can assess use tax going back several years. Let your NCO advisor know, they can help you assess the exposure and determine whether a voluntary disclosure makes sense before the CDTFA finds it.
You're not sure whether a purchase is subject to use tax.
The key question is: is the item taxable tangible personal property? If yes, and no California sales tax was charged, use tax is owed. If it was a service, use tax does not apply. Your NCO advisor can confirm for specific purchases you're uncertain about.
A vendor retroactively charged California sales tax on a purchase you already paid use tax on.
You paid twice. Keep the documentation from both and contact your NCO bookkeeper, you can offset or request a credit on your next return so you're not double-paying.
FAQ
Is use tax different from sales tax?
Functionally, no, it's the same rate and goes to the same place (the CDTFA). The difference is who pays it and when. Sales tax is collected by the seller at the point of sale. Use tax is paid directly by the buyer when no sales tax was collected.
Does use tax apply to software or digital downloads?
California's treatment of digital products is complex and varies by type. For business software purchased from an out-of-state vendor, use tax may apply depending on how the software is delivered and used. Confirm with your NCO advisor before assuming either way.
What if the online retailer charged sales tax for a different state, not California?
That doesn't satisfy your California use tax obligation. You owe California use tax on the California-applicable rate, regardless of what another state collected.
How do I know if the seller was registered to collect California sales tax?
If California sales tax appears as a line item on your invoice, the seller collected it and remitted it, you owe nothing further. If there's no California sales tax on the invoice, assume use tax is owed and flag it for your NCO bookkeeper.