Completing Your Tax Return

1. What are the basic steps to follow to complete a tax return?
2. What types of sales are included under gross sales?
3. What are "purchases subject to use tax"?
4. How do I report a use tax liability?
5. Can I deduct exempt transactions?
6. Common exemptions/deductions?

1. What are the basic steps to follow to complete a tax return?

There are four basic steps to follow in completing your tax return:

• You must first report:
  1. total sales for the reporting period (including lease and rental receipts),
     and
  2. total purchases that are subject to use tax (explained below)
• You will then list all exemptions to which you are entitled.
• Third, to determine the dollar amount subject to tax, you must subtract the total for deductions and exemptions from the total for sales and purchases.
• Finally, using the result from step three, you will calculate the state, county, local, and special district taxes that must be paid to the Board.

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2. What types of sales are included under gross sales?

The law requires that you report any sale of tangible personal property, whether or not you have been paid for the property. Normally, payment for your sales will be in the form of money (such as cash and charge sales). However, there may be times when you will receive other forms of payment (such as exchanges of property), and the fair market value of those payments must be reported.

Do not include receipts for the following sales under total sales:

• California Lottery sales (scratchers, lotto tickets, and so forth)
• Money order service charges
• Sales of gift certificates (see note below)

You must report a sale for the tax reporting period in which it occurs, even if you receive payment in a different period. For example, you may sell an item in June for $500, and allow the customer to take possession of it immediately on credit. Since the customer took possession of the merchandise (the sale took place) in June, you must report the $500 sale for that month, regardless of when you receive the balance due.

Note--gift certificate: Although you do not include the sale of a gift certificate under your total sales, you do report the sale that occurs when you accept the certificate for a sale of merchandise or property. The sale must be reported for the reporting period in which the certificate was redeemed.

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3. What are "purchases subject to use tax"?

A purchase may be subject to use tax for a number of reasons. The most common reasons are:

• You used property purchased with a resale certificate. If you use a resale certificate to purchase merchandise that you intend to resell, your supplier will not collect sales tax reimbursement. However, if you use the merchandise for another purpose before you resell it, you are liable for use tax. (Using merchandise for display or demonstration purposes before resale is not generally considered a use that is subject to use tax.)
• You used property purchased from an out-of-state retailer. In general, if you purchase equipment or merchandise from an out-of-state retailer without paying California tax and use the property for a purpose other than for resale, the purchase is subject to use tax and must be reported

NOTE: Use tax may also apply to leases. Please see Publication 46, Tax Tips for Leasing of Tangible Personal Property in California.

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4. How do I report a use tax liability?

If you make a purchase that is subject to use tax, you must report your purchase on Line 2 of your return. See note below.

Note-Purchases from out-of-state retailers

Some out-of-state retailers hold a Certificate of Registration-Use Tax and will collect and report California use tax on their taxable sales to customers in this state. If you paid California use tax to such a retailer, you are not required to report the tax. That retailer must provide you with a receipt showing, among other things, the amount of use tax collected. You should retain a copy of the receipt showing you paid use tax.

If you paid another state's sales or use tax on the merchandise, you can deduct the amount of tax paid under "sales or use taxes imposed by other states" on our return (you can be credited up to the amount of California tax due). You can claim credit for payment of another state's sales or use tax only on purchases for which you owe use tax. You cannot claim the credit for property you sell at retail.

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5. Can I deduct exempt transactions?

Yes. You will report (1) the total sales for your business and (2) purchases that are subject to use tax. Some sales will not be taxable and can be deducted to reduce the total amount subject to tax. For example, some labor charges are not subject to tax. If your total reported sales include nontaxable labor charges, you will need to claim a deduction for those charges. Otherwise you pay too much tax. There are many other types of deductions that can be claimed. Those deductions are explained in the following paragraphs.

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6. Common Exemptions/Deductions

The exemptions and allowable deductions described below are arranged in the order in which they appear on BOE-401, State, Local & District Sales & Use Tax Return. The information in this section is designed to provide an overview of the types of exemptions that can be deducted; it is not designed to provide detailed information about the requirements for each deduction. For additional information, you should call the Board's Information Center at 800-400-7115.

Note: You cannot claim deductions for transactions that have not been reported on your tax return. For example, you cannot claim a deduction for a sale to the U.S. Government unless the sale has been reported as part of total sales on your return. You must also keep documentation to support your claims for deductions.

Sales made to other retailers who purchased property from you using a resale certificate can be deducted. (If you sell property to another retailer for resale, and if that retailer presents you with a valid resale certificate stating that the property will be resold, you do not collect sales tax reimbursement from the retailer.)

Exempt sales of food products can be deducted. However, some sales of food products, including most meals, are taxable and cannot be deducted.

For more information on the taxability of food products, please contact the Board's Information Center at 800-400-7115 or your nearest Board office. You may also request one of the following booklets: Publication 22, Tax Tips for the Dining & Beverage Industry; Publication 24, Tax Tips for Liquor Stores; Publication 31,Tax Tips for Grocery Stores.

Labor charges for repairing, reconditioning, or installing tangible personal property are not subject to tax and can be deducted. For example, labor charges for installing a premanufactured part such as a car radiator would be nontaxable. However, labor charges associated with the creation of tangible personal property (such as charges for making a ring or furniture) are taxable and cannot be deducted. For more information on the taxability of labor charges see Publication 108, When is Labor Taxable?, or for more information, please call our Information Center at 800-400-7115.

Sales to the U.S. government or to some of its agencies and instrumentalities are exempt from tax and can be deducted. Examples of other exempt sales, such as those made to the American Red Cross and to qualified federal credit unions, are listed in the instructions that accompany your return.

Sales made to the state of California or to cities and counties and other local governments in the state are not exempt. They are to be treated like any other sale. That is, you report them under total sales and then claim any deductions that might apply. (For example, charges for nontaxable labor could be deducted.) See Publication 102, Sales to the US Government, for more information.

In general, the sale of tangible personal property you ship to an out-of-state location for use outside of California is exempt from California sales tax and can be listed as a deduction on your tax return. For more information on the conditions that must be met for an exemption to apply, please refer to Regulation 1620, Interstate and Foreign Commerce and and Publication 101, Sales Delivered Outside California.

Sales tax reimbursement included on Line 1 as part of your total gross sales can be deducted. If you do not report sales tax reimbursement as part of your sales, you may not take this deduction.

If you have reported a taxable sale and have been unable to collect payment for the sale, you may claim a deduction for the bad debt. Bad debts may take the form of:

• Checks returned unpaid by the purchaser's bank which you have determined to be uncollectible; or
  
• Accounts from charge or credit sales found worthless

The bad debt must be charged off for income tax purposes, or if you are not required to file income tax returns or if you file income tax returns on a cash basis, the bad debt must be charged off in accordance with generally accepted accounting principles.

You should claim the deduction on the return filed for the period in which the amount was found worthless and written off. If you later receive payment, you must report it on the sales and use tax return filed for the period in which the payment was made.

Some charges cannot be deducted as bad debt losses. For example, you can not deduct uncollected installation and insurance charges since these are not subject to sales tax. Likewise, you cannot deduct expenses in an attempt to enforce the collection of bad debts. Since there are many rules governing deductions for bad debt losses, please refer to Regulation 1642, Bad Debts or call our Information Center at 800-400-7115 for more information.

You may have purchased tangible personal property and paid California sales tax reimbursement or use tax on the purchase. Generally, if you sell the property prior to using it, you can deduct the cost of the purchase on your return. For more information, please refer to Regulation 1701, Tax - Paid Purchases Resold>.

You can claim a deduction for returned merchandise (the sale must have been previously reported on your return as part of your total taxable sales). Certain conditions must be met. For example, you must refund the full amount to your customer, including any sales tax reimbursement you collected (the refund can be cash or in credit), and you must not require your customer to purchase more expensive property to obtain a refund. For more information, please request a copy of Regulation 1655, Returns, Defects, and Replacements by calling our Information Center at 800-400-7115.

In claiming a deduction for returned merchandise, claim only the amount of your sales before sales tax reimbursement was added. For example, if the returned merchandise had been sold for $15 plus sales tax reimbursement, you would claim only $15 as a deduction.

Some businesses offer price discounts for cash payments or for payments that are made within specified time periods, such as 10 or 30 days. If your business offers such discounts, you may or may not be allowed to claim a cash discount on your return.

If you report the reduced selling price (the price after the cash discount) as part of your total sales, you cannot claim a deduction for the cash discount since you will have already excluded that amount from your total sales.

If you report the full price of the item (the price before the discount was given) as part of your total sales, you can claim a deduction for the cash discount since the price you are reporting overstates the actual selling price.

If a cash discount is given after the sale has been reported to the Board, you may have overpaid the tax due on the sale. To ensure that you receive proper credit, you will need to take a deduction for the discount given. If this situation applies to you, you should contact the Board's Information Center at 800-400-7115 or contact your nearest Board office for advice on how to report the cash discount.

Regardless of how you report a cash-discounted sale, sales tax must be based on the actual selling price of the property. Moreover, you cannot deduct a cash discount for nontaxable transactions, such as a cash discount on repair labor.

For more information on cash discounts, please refer to Regulation 1671, Trading Stamps and Related Promotional Plans and Regulation 1700, Reimbursement for Sales Tax.

The deductions listed above are the most common. There are other exemptions that may apply to your business, such as sales of prescribed medicine. If you would like more information on exempt and deductible sales, please refer to Publication 61, Sales and Use Taxes: Exemptions and Exclusions.

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