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Legislators in California, some of whom have historically opposed a sales tax of online purchases, are now rethinking their stance, mostly due to the $35 billion budget gap. This fiscal crisis is one of the worst in the state's history and lawmakers, including Governor Gray Davis, are willing to consider almost any option to take care of the problem. While some companies have been able to avoid collecting online sales tax by using a bricks-and-mortar system, that loophole would be closed with the proposed bill. It was noted that some companies are not waiting for states to decide how they plan to begin collecting the tax. Several companies such as Wal-Mart and Target began voluntarily collecting their own tax for online purchases in return for immunity from owing any back taxes. (San Jose Silicon Valley Chamber of Commerce Annual Power Lunch; Fact Sheet on S.B. 103; Miscellaneous interviews with spokespersons from US Internet Industry Association, Governor Gray Davis, and NCSL.)


In California, a new line has been added to the 2003 income tax returns in which taxpayers must report use tax owed for out-of-state purchases. The Franchise Tax Board has found that many taxpayers are confused by this addition and are having problems properly reporting their purchases. This new line is for out-of-state purchases only. These out-of-state purchases can include, but are not limited to, purchases over the internet, by mail or phone order, or in person while in another state. Many taxpayers are simply entering the wrong information on the use tax line. The most common error seems to be the entering of the taxpayer's county sales tax rate rather than the amount of tax owed. There is a worksheet available for calculating total use tax due on Form 540, page 21. There currently are 19 states that have included use tax lines on state tax returns. (Press Release, "FTB Provides Tips Regarding Use Tax Line on State Return", California Tax Board, February 2, 2004)


Purchases of tangible merchandise for storage, use, or other consumption in California from out-of-state vendors not collecting California tax are subject to a use tax liability on the purchase price of such property. Effective January 1, 2004, California instituted an in-state voluntary disclosure program. Some of the benefits of participating in the program include: 1) a reduction in years in look-back period from eight to three, 2) a waiver of the late filing and payment penalties, and 3) anonymity for an opinion of liability given by the Board of Equalization. (State Board of Equalization News Release #75-M, December 30, 2003)


Recently passed laws in California will affect several types of taxes, one in particular being the sales and use tax rate. Components of the statewide 7.25% sales and use tax rate change will change, effective July 1, 2004. Among these rate changes: (1) increases in the state portion of the sales and use tax rate by 0.5%, (2) decreases in the local sales and use tax rate by 0.5%, and (3) creation of the Fiscal Recovery Fund, requiring that the revenues from the new 0.5% state sales and use tax to be deposited into this fund and dedicated for the repayment of the deficit funding bond. (California Tax Information Bulletin, Date Decided: November 18, 2003)


It is scheduled to be operative January 1, 2004. At the discretion of the State Board of Equalization (SBE), and consistent with the efficient use of audit resources, taxpayers who meet the following criteria could be considered candidates for a managed audit starting in January. The criteria are: 1.)Persons whose business involves few or no statutory exemptions; 2.)Persons whose business involves a single or small number of clearly defined taxability issues; 3.)Persons who agree to participate in the managed audit program; and 4.)Persons who have the resources to comply with the managed audit instructions provided by the Board. (Sec. 7076.1 and California Legal Summary, 2003)



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