CSLB Law & Business ExamBusiness FinancesMedium
A California contractor purchases $5,000 in materials from an out-of-state supplier who does not charge California sales tax. What is the contractor's obligation regarding this purchase?
- ANo tax is owed since the seller is out of state
- BThe contractor must self-assess and pay California use tax on the purchase
- CThe customer is responsible for paying the tax at project completion
- DThe contractor may deduct the tax as a business expense instead of paying it
Show answer & explanationAnswer & explanation
Correct answer: B. The contractor must self-assess and pay California use tax on the purchase
California imposes a use tax on taxable goods purchased from out-of-state sellers when sales tax was not collected. The contractor is responsible for self-reporting and remitting the equivalent use tax directly to the California Department of Tax and Fee Administration (CDTFA).
Why the other options are wrong
- A. Incorrect: California requires use tax on untaxed out-of-state purchases.
- C. Tax liability rests with the purchaser (contractor), not the customer.
- D. Use tax is a liability owed, not simply a deductible expense in place of payment.
Use Tax
A tax owed on taxable purchases made from out-of-state sellers when California sales tax was not collected at the time of purchase.
- Complements the sales tax system to prevent tax avoidance
- Contractor must self-report and pay to CDTFA
- Applies to materials, equipment, and other taxable items
Memory trick: If sales tax wasn't collected, use tax fills the gap.