What Is Use Tax?

Use tax is the mirror image of sales tax. When you buy something in California, the seller collects sales tax at the point of sale. But when you buy something from an out-of-state seller who doesn’t collect California sales tax, you owe use tax on that purchase instead. Same rate, same concept — it just shifts the reporting responsibility from the seller to you, the buyer.

The statewide base rate is 7.25%. On top of that, local district taxes push the total rate anywhere from 7.25% to 10.75%, depending on where you live. Some examples:

• Los Angeles: 9.5%
• San Francisco: 8.625%
• San Diego: 7.75%
• Oakland: 10.25%
• Long Beach: 10.25%

Your use tax rate matches the combined sales tax rate for your location. If you’d pay 9.5% sales tax at a store in LA, you owe 9.5% use tax on untaxed purchases shipped to your LA address.

Why This Line Used to Matter More

Before 2019, most online retailers didn’t collect California sales tax. You’d buy a $500 piece of furniture on some website, no tax got charged, and technically you owed use tax on it. California put a line on the 540 asking you to self-report. The compliance rate was abysmal. The CDTFA (California Department of Tax and Fee Administration) knew it, and everybody knew it.

Then the Supreme Court’s Wayfair decision in 2018 changed the game. States could now require out-of-state sellers to collect sales tax. California followed up with marketplace facilitator laws that took effect in 2019, requiring platforms like Amazon, eBay, Etsy, and Walmart.com to collect and remit California sales tax on behalf of their sellers.

The result: if you’re buying from any major online marketplace, sales tax is already being collected. The use tax line on your 540 is less relevant than it used to be for everyday purchases. But it hasn’t disappeared, and there are specific situations where you still owe it.

When You Still Owe Use Tax

The use tax line isn’t dead yet. These situations still trigger it:

• Vehicles purchased out of state — Buy a car in Oregon (no sales tax) and register it in California? You owe use tax on the full purchase price. On a $45,000 car in LA, that’s $4,275 at the 9.5% rate. The DMV will collect this when you register the vehicle.
• Boats and aircraft — Same deal. Purchase a boat from a private seller in another state, bring it to California, and use tax applies. These are big-ticket items where the tax amount is substantial.
• Artwork and collectibles from private sellers — Buy a painting from a private seller in Nevada for $20,000. No marketplace facilitator collected tax. You owe use tax.
• Purchases from small out-of-state retailers — If a seller doesn’t meet the threshold for collecting California tax (under $500,000 in CA sales), they may not charge you tax. You’re technically on the hook for use tax on those purchases.
• Items bought abroad and brought into California — A $3,000 rug from Morocco, a $5,000 watch from Switzerland. If you bring it into California for use here, use tax applies (minus any foreign duty you already paid, in some cases).

The Lookup Table on the 540

California offers a shortcut for small amounts. Instead of tracking every untaxed purchase, you can use the Use Tax Lookup Table included with the Form 540 instructions. The table gives you a flat amount based on your AGI:

• AGI under $20,000: $2
• AGI $20,000-$39,999: $7
• AGI $40,000-$59,999: $12
• AGI $60,000-$79,999: $17
• AGI $80,000-$99,999: $22
• AGI $100,000+: varies (tops out around $50-60 for very high income)

This lookup table only covers small, routine purchases. If you bought a car, boat, or anything else over $1,000 without tax, you can’t use the table — you have to report the actual use tax owed on those items separately.

Most tax software will ask you whether you had any untaxed purchases. If you just bought random small items, the lookup table amount is the path of least resistance. For big purchases, you’ll need to calculate the exact amount.

Common Mistakes

The most common mistake is ignoring this line entirely. For routine online shopping, that’s mostly fine now because marketplace facilitators collect the tax. But people who bought a car out of state and skipped the use tax? The DMV and CDTFA will find you. Vehicle registrations are cross-referenced, and this is one area where enforcement is real.

Another mistake: paying use tax on something where sales tax was already collected. If Amazon charged you 9.5% on a purchase, you don’t owe use tax on that item. Check your receipts. Some people see the use tax line and panic, reporting tax on purchases that were already taxed.

Third: not knowing your local rate. If you moved from San Diego (7.75%) to LA (9.5%) mid-year, the rate depends on where the item is used, not where you were when you bought it. A couch shipped to your LA apartment gets the LA rate, even if you ordered it while you were still living in San Diego.

Where This Fits on Your 540

The use tax line appears in the tax section of your Form 540, typically before credits. It gets added to your income tax liability. After the total tax is calculated (including use tax), credits like the PTE credit, Other State Tax Credit, and renter’s credit reduce the total. Then estimated payments and withholding are applied to determine your refund or balance due.

For most filers, this line is a non-event. But if you’re one of the people who bought a Tesla in Oregon to avoid sales tax and then drove it home to Malibu — the FTB and DMV are waiting for you on this line.