Unlike most states, California has an odd use tax exemption for purchases of certain foreign goods. Basically, if someone buys taxable goods while traveling outside of the U.S. and carries them back to California, the first $800 of such goods are exempt from use tax. This exemption at R&T section 6406 can be used every 30 days. It was enacted in 1990 to match what was then a $400 federal duty exemption (since increased to $800). However, the use tax exemption and duty exemption do not match (for example, if you out of the country less than 48 hours, your duty exemption is $200 but your use tax exemption is $800).
Back in 1990, even fewer people than today knew about the use tax. Also, actions by the Board of Equalization to send bills to Californians (based on their federal duty form), were not well received.
Today, a lot more people know about the use tax and California has simplified efforts to pay it, including having a line on the state income tax form and a "look-up" table where use tax is estimated based on your income. Also, the state is trying to encourage people to be compliant, even noting in this past filing season, that paying use tax is good for the state, potentially allowing for 7,000 more police officers! (click here for that BOE poster)
The hand-carried foreign goods use tax exemption harms efforts to collect use tax. After all, does the state really want your use tax on $300 of clothes you bought from Overstock.com or eBay when someone bringing $800 of clothes back from their Caribbean cruise is not required to pay use tax?
I had the opportunity to present my proposal to legislative and BOE staff in February 2014 as part of the California Bar Tax Section's Sacramento Delegation trip. The paper was published in State Tax Notes on June 9, 2014 (here) In the paper, I also provide some additional reasons for repealing the exemption, as well as some ways to do it.
Because this is a tax increase, it would need a 2/3 majority vote, which is difficult. It would have been appropriate to have included this in the legislation of a few years ago where the "look-up" table was added, making use tax recordkeeping and calculations easy. Perhaps the next best opportunity would be after the Marketplace Fairness Act is passed by Congress and signed by President Obama and California makes changes to its sales tax law to take advantage of the act.
You might be saying - who cares, this can't be much revenue. While it is not much revenue, that same argument could be made to add more use tax exemptions. That would be silly. To build more respect for the use tax system, recognize today's ease of paying it, the need for revenue, and equity, this exemption should be repealed.
What do you think?
Other recent “Sales Tax Policy - Tales & Trends” posts by Annette Nellen, CPA, ESQ:
- With Sales Tax Software, Are Sales Tax Discounts Still Appropriate?
- Idaho Keeps Sales Tax On Groceries
- Sales Tax Policy Outlook for 2017
- Would Broader Sales Tax Base Deliver Simplification - and Savings?
- Trailing Nexus - When Does It End?