If you are a California business owner, and you received $100,000 or more in gross receipts in a calendar year, then you most likely have heard from the Board of Equalization ("BOE") informing you that you are a "Qualified Purchaser" and reminding you to register and file your newly required use tax return. If you are looking for guidance on what this means for the horse industry and what to do, then this article is for you.
(1) The basics:
Many people missed this deadline because they did not know what was required of them. It is not too late to file. While penalties will be applied for all late returns (10%), and interest will accrue each month until payment is received, it is important that you file as soon as you can if you meet the requirements of a Qualified Purchaser and you missed the April 18 deadline. The BOE does provide an opportunity for Qualified Purchasers to make a request for relief of penalties in relation to the new use tax registration requirement (see Form BOE-735 on the BOE's website).
The Qualified Purchaser requirement generally covers anyone who receives at least $100,000 in gross receipts from business operations during a calendar year, and who has not been previously required to register with the BOE. Note that the gross receipts total includes proceeds from both in-state and out-of-state business operations. Once the BOE determines that you have met the requirements as a Qualified Purchaser in any one year, then you are required to stay registered and file every year regardless of whether you owe use tax, so long as your business continues to be in existence or until there is a change in ownership. While you previously may have paid any use tax liability on your California state income tax return, you are still required to register with the BOE per California Revenue and Taxation Code section 6225. Further, beginning in the 2010 tax year, you must report and pay use tax directly through the BOE and can no longer pay on your state tax return if the purchases are related to your business. You can do this by eFiling with the BOE if you are a Qualified Purchaser. If you do not meet the requirements as a Qualified Purchaser, but do make out-of-state purchases for which sales tax was not collected (or less than the applicable amount of sales tax was applied), then you may report your use tax liability by filing Form BOE-401-DS.
(2) How does this apply to the horse industry?
Common examples of where use tax may be triggered in our industry, but often goes overlooked, include purchases made online such as those for horse supplements, blankets, tack or grooming supplies, and other equipment. It is not unusual for online retailers who are located out-of-state to forego charging sales tax to California residents. Generally, use tax will apply to purchases of tangible personal property where sales tax was not included, and the item is brought into California to be used or enjoyed. Use tax can even apply to a horse purchased in another state but brought back into California as the purchaser's intended place of use. Specific exemptions to sales and use tax exist, but in any case, it is important to keep clear records of all of your purchases and the amounts of any sales tax charged, as you can deduct this amount from any use tax owed or may be able to use this information to limit your tax liability. If you are contemplating a large transaction, such as the purchase or sale of a horse, we recommend that you reach out to your tax advisor beforehand to understand whether tax will apply. We know this is more paperwork and more costs for the horse industry, but we want to keep you aware of obligations, deadlines, and any potential tax liabilities, as well as provide an opportunity to answer questions and reduce
(3) It's easier to file than you think:
The good news is that it is easier than you think. On the letter you received from the BOE, you should see an account number and express login code. You can use these two items (or pass them along to your CPA) to login and eFile your use tax return, and can pay any tax owed with a credit card. If you enter the total of your out-of-state purchases for which sales tax was not applied, the site will provide the use tax calculation for you. The use tax rate will be the same as the sales tax rate for your city or county. You will have the opportunity to pay for the past three tax years (2008, 2009, and 2010). The BOE has generally chosen to enforce this requirement only with regard to the past three tax years, but can look back further if they so choose. Penalties and interest charges will likely be assessed if use tax was owed but not paid until after the due date.
(4) Points to remember:
If you are a Qualified Purchaser, you must register and file by April 18, 2011 for the 2010 tax year (even if you do not owe any tax). The due date has been extended from April 15th in order to coincide with the federal income tax due date. The use tax return is a separate return from your income tax return. Unlike your income tax returns, extensions are not automatically granted, and if approved, will only provide for an additional 30 days to file.
At Hey and Hey, we have been bringing awareness to this tax issue by analyzing clients' situations to determine whether their purchases or sales of horses, or other related activities, are subject to tax. It is highly recommended that a person review their situation prior to a transaction to be sure that they are either exempted from tax, or if required, that the transaction is conducted in a legal and tax efficient manner. We have posted additional articles on our website that you may find helpful as further resources. Please do not hesitate to call or email us if you have any questions.