Governor Gavin Newsom of California signed Assembly Bill (AB) No. 1097 on October 7, 2023. The new law introduces a significant change to a key criterion that dictates when an individual or business is required to register with the California Department of Tax and Fee Administration (CDTFA) for use tax purposes.
Background
In California, use tax is required to be paid by anyone who stores, uses, or consumes tangible personal property within the state, provided no sales tax was collected by the seller at the time of purchase.
California established the Qualified Purchaser Program in 2009, requiring qualified purchasers to register with the CDTFA to report and remit use tax on their purchases of taxable items from sellers who don’t collect California sales tax. Qualified purchasers must file a use tax return with the state by April 15, annually.
The purpose of the program was to require taxpayers who are primarily service providers—and not required to register and file sales tax returns—to register for a use tax permit and report and pay any use tax on purchases from out-of-state vendors.
Under the Qualified Purchaser Program, a qualified purchaser was any individual or business that satisfied all the following conditions:
- Not required to hold a seller's permit or certificate of registration for use tax
- Not holding a use tax direct payment permit
- Receiving at least $100,000 in gross receipts from business operations per calendar year
- Not otherwise registered with the CDTFA for reporting use tax
What’s Changed
AB-1097 amends the definition of qualified purchaser. The previous condition that an individual or business receive at least $100,000 in gross receipts per calendar year, as described above, has been replaced with a new condition that an individual or business make more than $10,000 in purchases subject to use tax per calendar year. Consequently, individuals and businesses are now required to register with the CDTFA for a qualified purchaser use tax account if they meet all the following conditions:
- Not required to hold a seller's permit or certificate of registration for use tax
- Not holding a use tax direct payment permit
- Making more than $10,000 in purchases subject to use tax per calendar year without prior payment of tax to the sellers
- Not otherwise registered with the CDTFA for reporting use tax
This change takes effect January 1, 2024, and will remain in place until January 1, 2029.
Who’s Affected
This change has the potential to impact a wide range of individuals and businesses throughout California. Specifically, individuals and businesses who weren’t qualified purchasers under the prior definition, but now meet the new criteria, have a requirement to register with the CDTFA for a qualified purchaser use tax account to report and remit use tax.
Individuals and businesses making frequent or substantial purchases of taxable items from out-of-state sellers who don’t collect California sales tax at the time of sale now face an increased likelihood of becoming subject to California’s use tax reporting requirements for qualified purchasers.
Businesses should establish processes to review their purchases for potential use tax liability, both on an ongoing and historical basis, so they can achieve and maintain compliance. If your business previously established these processes, now is a good time to revisit them to account for new changes going forward, as well as to review prior compliance with the existing laws for open periods.
We’re Here to Help
For more information on how this case, or others, could affect your sales and use taxes or how the program could affect you or your business, contact your Moss Adams professional.