by Tom Alston
What many people do not know is that use tax exemptions apply to all forms of tangible personal property (TPP). In my years of tax experience I have reviewed cases involving race horses, portable concrete plants, cameras and lighting equipment, sound studio equipment, art work, gun collections, etc. Basically if you can touch it or feel it the Board of Equalization (BOE) can tax it if they believe the property was brought into the State of California.
Upon learning this, taxpayers will ask some questions:
1. How does this work if my purchase/purchases happened a long time ago.
Call me regardless of what TPP you bought and give me the details of the purchase and I will give you the exact truth of what can be done. I do not charge clients if I can’t help them to legally avoid the tax. I want you to get it right.
2. I have never been assessed use tax before why should I worry about it now?
Let me explain why use tax applies to every business in California including those without sellers permits. First, I will discuss what happens during a sales tax audit by a BOE field auditor of a business that has a California sellers permit. One of the most frequent areas where retailers (a business with a California sellers permit) are assessed additional tax is “unpaid use tax.” The BOE not only audits for correct collection of sales tax, they also audit for uncollected use tax. The documents that are audited for these taxes are contained in the purchase journals of the business.
The auditor is trained to review all the items placed on the company’s depreciation schedule to make sure that the sales tax was paid on all the purchases. For example if a piece of equipment was purchased from an out-of-state seller and shipped into California where it is being used by the audited business the equipment will be subject to “use tax” not “sales tax” in California. The rate is the same. The penalties and interest are the same.
Additionally, after a review of all purchases a list is made of anything that was shipped in from out of state and no tax was paid, or if anything is bought from an individual or company without the sales tax included. These purchases are also subject to use tax.
The above mentioned purchase will be subject to use tax in California minus the sales tax paid to another state (prior to the equipment entering California after the out of state purchase). The purchase can also be exempted from California tax if the equipment can support a claim for an exemption from the use tax. These exemptions are similar to those available for aircraft, vessels and vehicles, BUT NOT THE SAME.
3. But, what changed?
Up until very recently the reason why aircraft, vessels and vehicles were easily discovered for audit is that all of these items require some form of state or federal registration. For example, the BOE routinely got information from the FAA in the case of aircraft, the DMV in the case of vehicles or the Coast Guard registration for certain vessels. These registration lists became the BOE’s marketing or mining list for potential use tax. Therefore the BOE’s primary targets for audit in sales tax were retailers with sellers permits (sales tax) and vehicles, vessels or aircraft (use tax).
4. Why do I worry about it now?
My guess is that many California business owners have received a letter from the Board of Equalization (BOE) over the past few months notifying them that the BOE has arbitrarily assigned them a Use Tax permit number and has set up an electronic account for them to file their returns.
A copy of a real letter can be seen here. It was sent to my firm which is in the consulting business and we sell no TPP.
I am in the sales/use tax business and this was my initial reaction to receiving this form. “Who the hell do they think they are?”
I was very angry and called a person at the BOE. I told him, “I am in the sales/use tax business. I know how to file all the forms. I already know that if I make any purchase of TPP and I don’t pay sales tax at the time of the purchase that California use tax is due on the purchase. I know how to pay it and I know how to report it. I want this account number canceled.” I don’t think I swore at him. But, the young man did a great job of handling my communication.
He explained that letters have been going out for several months and the BOE is concerned that people don’t totally understand what is happening. He said he has been doing nothing but answering the phone about these use tax accounts.
The summary of what I told him went something like this, “Look I am not mad at you. We both know that you have been given a job to do by people that are so deficient in sanity they can not even balance a checkbook. This is about control and increasing government intrusion into peoples’ lives.” He said he can not comment on that.
People who have met me know my views on government suppression, insane economic policies and tax collectors. It doesn’t take much for me to get animated and on my soap box about violations of the State and Federal Constitution disguised as politicians need to spend more money than they have. My temperature on this issue was mildly feverish for a few days. Then I realized that my clients rely on me.
I am their representative. They rely on me to keep them out of trouble with the BOE. Even though we are all in the same “foxhole”, my clients can get angry about the issues and scream about the unfairness of the government actions, I have to maintain my leadership position and maintain my composure under fire.
Once I resumed being the leader on this issue, the truth revealed itself quite easily. Very few businesses that do NOT have a California Seller’s permits and do NOT endure sales tax audits by the BOE have any EASY way to understand use tax. Most entrepreneurs’ immediate reaction to this BOE letter will be to ignore it and refuse to comply.
The decision to ignore to timely file your use tax return before April 15, 2010 will cost California business owners so much money it may bankrupt many of them. DO NOT LET THIS HAPPEN TO YOU OR ANY BUSINESS THAT YOU ARE PART OF.
The following is intended to be a piece of fiction just to make my point. It takes place in a fictional state called Peoples’ Republic of Paradise. They actually use a denomination of currency called the “flimflam”, but I converted it to dollars to keep the confusion down in my story.
Jonathon Grimes was a college drop out computer geek that created a multi-billion dollar software company that dominated the interactive games industry by selling licenses to his proprietary software. Software is not TPP. Jonathon’s sudden rise to fame and fortune had been assisted by lawyers and accountants because he did not have time to handle the “books” while he was building his fortune. Jonathon lived in a high rise apartment on the top three floors of a 50 story office building he owns in the mystic City of St. Francis. His several thousand employees work on the lower 47 floors.
Jonathon flew his own Citation Jet between his offices on the West and East Coast of the Socialist Republic of Marxland. He owned an additional home in the Euro community made famous by the public beheading of an arrogant queen.
Daddy Bigbucks owned a successful heavy equipment company in St. Joseph that sub contracted work to the State Highway Division for infrastructure projects inside Paradise. It did not sell tangible personal property, therefore it did not have a seller’s permit and did not collect and remit sales taxes to the state of Paradise. Daddy owned a Light Jet aircraft, a power yacht, and his 12 car garage was full of V-8-rear-wheel drive-horsepower. He was a classic individual that created his fortune by not necessarily “coloring inside the lines.” He thought on his own, made his own judgments about right and wrong and followed his own instincts when any decision was made.
Daddy had been in business for 22 years. Therefore, history had taught him that the manner in which he had been reporting and paying his taxes was accurate.
Roberto Carlos Morales had a family run business that took photos at parties and weddings in the city of Angels. After legally immigrating to the State of Paradise in Marxland he worked at various odd jobs until his photography business grew to a point that it generated enough income to feed and house his entire family.
Roberto lived modestly and avoided any publicity that attracted the attention of the government. He carefully paid all taxes and never was late with payments to any government agency. Many of his ancestors had been murdered at the hands of a dictatorship in his home country.
Paradise, through years of mismanagement of resources had reached a point in the year 2010 that the debt load was unbearable. Every politician was pointing their finger at each other as being the culprit. One party blamed the government, one party blamed the rich. The party that blamed the rich had used accounting systems that magically balanced budgets by promising they will collect sufficient revenue to cover their actual expenses. Routinely they balanced their budget by understating actual expenses and moving some expenses off the books to the following year. Once they even balanced a budget by declaring they were going to hire more tax collectors even though they never hired them.
After fifty years of teaching “government accounting” to private companies and then putting them in jail for using “routine government accounting practices” the State of Paradise was bankrupt. However, the party in control couldn’t help them selves so they concocted another new system that would provide a little extra actual cash and would create a fairly large receivable for their use tax agency (UTA) so they can pretend to have saved the day by miraculously balancing a budget.
The Paradise UTA created on-line e-accounts in the name of every business inside the State of Paradise. They knew from history that some businesses would comply and file the 3 years of back returns. These filings would generate a little cash and a lot of work for UTA employees to review these returns. The UTA knew most businesses will ignore the decree through either indifference or ignorance. It wouldn’t matter, because the result would be the same. Large tax assessments based on the whim of the UTA.
For every contact on their list of businesses that “failed to timely” respond, the UTA created an assessment of use tax “out of thin air.” The receivable for the UTA amounted to ten billion dollars of tax because of these imaginary assessments. The politicians’ in the party that created this mess declared the budget had been balanced and in fact they declared they had created a surplus because they had discovered all the tax cheating rich people that had been defrauding the State of Paradise. The UTA created a ten billion dollar receivable by assessing 100,000 businesses at an average of $100,000.00 dollars.
The poor and unemployed rallied in the streets of the major cities (St. Francis, St Joseph and Angels) because the day had been saved. In their frenzy the happy marchers smashed the windows of every office building on the main streets of their town. Only half of these buildings were repaired as the other half had been vacant for two years because the jobs had already disappeared.
Some actual money was collected by the UTA because businesses like the one owned by Roberto Carlos Morales that were assessed less than $10,000.00 realized it was cheaper to pay the money than to fight with the tax collectors. They never realized that if they had filed the correct returns in a timely manner it may have cost them only $500.00 in correctly stated tax.
Jonathon Grimes’s business was assessed close to three million dollars of tax. He ultimately paid over $300,000.00 in fees to lawyers and accountants to fight the assessments. The fees to fight the assessments were extremely high because in an investigation by Rolling Stone Magazine ten years after the crisis it was discovered that politicians’ had ordered the tax department to deny all claims even if the facts and documents supported that the assessment was erroneous, inflated or completely bogus. As long as the tax department continued to deny the claims the politicians could balance the budget with the “government accounting principle” that “if a receivable existed” the money counted as income versus the budgeted expenses. Ultimately, around 20 million dollars was collected and that was not enough to rebuild the UTA buildings that were destroyed by the families that had been ruined in the use tax scam.
Daddy Bigbucks chose not to file any response to the assessment. Even after many letters from the tax agency advising the taxpayer of his rights and obligation, the business owner chose not to respond. The tax agency halted all attempts to communicate with the taxpayer and put their collection specialists on the case. The collections people placed a lien on the bank accounts of Daddy Bigbucks and all the business that ignored them and immediately collected several billion dollars that had been assessed against this group of business owners.
Disgruntled business owners like Daddy Bigbucks found that because they had ignored written communications from the tax agency they could not use the normal process to appeal the bogus assessment. When they went to court to sue the state to get their money back they were informed they had no legal standing to claim a refund as the tax agency had notified them in writing through the whole process of the proper method of filing an appeal. When the business owners failed to respond in writing the UTA was within its rights to collect the money. Daddy Bigbucks had lost his right to sue Paradise because he had not complied with the written notices and given the state the opportunity to use the system designed to protect the taxpayer.
The politicians again claimed another moral victory against the rich. Enthusiastic marchers partied in the streets and set fire to the vacant office buildings which now stood at 100% of the buildings on main streets of their cities. Everyone was on unemployment so the demonstration created a little diversion from their misery.
One morning years after the street demonstrations, an exhausted Daddy watched from the front seat of his last remaining car as a UTA building smoldered. The previous night Daddy has saved three janitorial personnel that had been trapped in the fire when there were no fire department trucks left to respond to the fire alarm.
The Governor later ordered Daddy’s arrest via an e-mail from China where she was on a government paid mission to attempt to acquire some financing for Paradise. The charges of trespassing a UTA building still remain an open case in the files of the State Attorney General. There are no employees left to act on the thousands of e-filed cases.