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Saturday, May 26th, 2012
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Tax Alert
Understanding sales and use taxes is essential for many equestrians.
By Jessica L. Poursohi, equine tax attorney with Hey & Hey Attorneys At Law
If you own a California business, and you have $100,000 or more reported on your California state tax return, you will be receiving a letter from the State Board of Equalization. The letter will tell you to register with the Board of Equalization and begin reporting and paying use tax.
With the new use tax law recently enacted by California, it is more important than ever that professionals and enthusiasts alike involved in our industry be aware of the implications that the keeping and selling of horses has on their tax portfolios. When buying or selling a horse it is possible to trigger taxes that you may not have considered. To help in recognizing the cases that would mean you are exempt, and to make sure that you retain the records you need in order to prove same at tax time, it is important to keep the following issues in mind.
Who is a "Qualified Purchaser"?
A 2009 bill (Assembly Bill x4 18) has made it a requirement that "Qualified Purchasers" register with the Board of Equalization to report and pay use tax. The definition of a Qualified Purchaser is broad and is expected to include approximately 200,000 California businesses within its scope. Generally, it 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 Board. The intent of this law change is to facilitate collection of the often overlooked use tax in California and to assist in closing the tax gap by bringing in more revenue that generally is owed but not paid.
What is Sales and Use Tax?
California tax law requires that sales or use tax be charged for all sales of tangible personal property unless specifically exempted, and per the law, horses are tangible personal property. So what does this mean? In simple terms, it means that the seller of a horse is responsible to pay sales tax. The seller may be reimbursed for the tax from the purchaser, and usually collects this as part of the sale. This is just like when you purchase something at a department store for example, you pay the sales tax on your purchase. If the seller does not collect sales tax from the purchaser, then it is possible that the buyer is responsible for the use tax.
California use tax has been around since 1935. It was enacted to protect California businesses from out-of-state retailers who were not charging their customers sales tax. It makes it so that a customer cannot avoid tax simply by driving across state lines to make a purchase in a neighboring state with little or no sales tax, or in keeping with current times, make a purchase over the internet from an online company that does not charge sales tax. Use tax is the responsibility of the purchaser and applies when you buy something that will be used, stored, consumed, or given away in California for which tax was not paid. A common example when use tax might be triggered is for purchases of feed and other horse items or equipment from a business located outside of California. It can even apply to the purchase of a horse from an individual located in another state. Use tax is based upon the gross amount of the transaction, and at the same rate as sales tax. Either sales tax or use tax is charged, but not both. Individuals and businesses alike are supposed to report and pay use tax, however only businesses that meet the $100,000 threshold are required to register with the Board.
In addition, if the transaction (i.e., the sale of the horse) is taxable then commissions and other labor or service charges related to the transaction are also generally taxable.
Are there exemptions? Yes. The exemptions available are very specific and you must have proper documentation to support a claim. Some examples that may apply to the horse industry are: (1) occasional seller Ð a person who makes less than 3 sales in a 12 month period; (2) sales of feed used for horses held for resale or for breeding purposes; and (3) items sold into interstate commerce (immediately leaving the state).
At Hey & 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. Please do not hesitate to call or email us if you have any questions.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under federal, state or local tax law or (ii) promoting marketing or recommending to another party any transaction or matter addressed herein.
You’re Invited to Call or E-mail!
“If you have questions or comments about any aspect of law relating to horses,
please don’t hesitate to call or send me an e-mail. I’ll be glad to hear from you --
and promise I will do everything I can to help you!” -- Polly