You May Be Paying Too Much Sales and Use Tax
Senior Manager in our Tax Department, Tyler Willis, CPA, MST, had an article published in the Fall issue of the Coastal Grower Magazine. Read below to find out why you may be paying too much sales and use tax.
The California Taxpayer Transparency and Fairness Act of 2017 was signed into law by Governor Brown on June 27, 2017. The legislation established two new state departments that will assume the primary duties currently held by the State Board of Equalization (BOE). The California Department of Tax and Fee Administration (CDTFA), one of the newly established departments, will begin managing taxes associated with fee programs, tobacco taxes, sales taxes, and others starting July 1, 2017. The BOE retained their authority over alcohol excise taxes (as granted by the state constitution), which means wineries will find themselves working with both entities in the near future.
The good news: so far, not much has changed. Even the new CDTFA website currently redirects many requests to the preexisting BOE website.
The better news: there are still opportunities to reduce the amount you have been paying in sales and use taxes.
The general rule is, sales or use tax should be collected once in the lifecycle of a product and the person paying the sales or use tax should be the end user of that product. This means that when something is purchased for resale, or a component of something that will resold is purchased, sales and use tax is not typically paid.
Here are four categories of goods that are exempt from sales and use tax or are subject to a reduced rate.
1) Winemaking Raw Materials and Ingredients
The BOE has published an extensive list of items defined as “raw materials and ingredients.” Because these items are considered to be part of a finished good, they are treated as “purchased for resale” and are not subject to sales tax when purchased by a winery who sells to the public.
The BOE makes an important distinction between “ingredients” and “processing aids.” An item purchased primarily as an aid in the winemaking process is considered to be a “processing aid” and is subject to sales or use tax. Examples of “processing aids” include products to stabilize juice color before fermentation, chemicals that assist yeast during fermentation, and fining agents to clarify the wine. Classifying additives correctly is important to ensure that sales tax is only paid on items where it is required.
Common items that are not subject to sales and use tax are: Carbon Dioxide, nitrogen gas, malic acid, tannin, tartaric acid, and many more. The items are listed by the BOE in the Tax Guide for Winemakers and Distributors.
2) Winery Equipment and (some) Supplies
Wineries qualify for a partial exemption of sales tax on the purchase or lease of winery equipment under the BOE’s Manufacturing Exemption. The current partial exemption allows for a reduction in state sales tax at the rate of 3.9375 percent. For the partial exemption to apply, the machinery or equipment must be used in manufacturing at least 50% of the time. Purchasers should provide sellers with a partial exemption certificate to obtain the reduced rate when purchasing or leasing equipment.
Common items that would be subject to a partial exemption include: crushers, de-stemmers, pressers, tanks, barrels, oak chips, and bottling equipment.
3) Bottling and Packaging Supplies
In general, packaging materials are not subject to sales and use tax as long as the person purchasing the items will resell the materials with their finished goods. The exception to this rule is for wine used in the tasting room when sales tax is not charged on the tasting fee. When a fee is not charged for tasting or, sales tax is not added to the tasting fee, the winery is considered to be the end consumer and now must pay use tax on the items originally purchased for resale. To simplify compliance with this rule, tasting rooms can make the tasting fee inclusive of sales tax and post a sign notifying customers that sales tax is included in the fee charged.
Common items that are not subject to sales and use tax include: bottles, corks, labels, capsules, cartons, pallets, and even wrapping materials.
4) Vineyard Equipment and Supplies
California provides a partial sales tax exemption for agricultural equipment and machinery. The exemption is a 5 percent reduction to the sales tax rate that would normally apply based on the location of the purchase. For the exemption to apply, the item must be a tool, machine, equipment, etc used in at least 50% of the time in agricultural operations and sold to a “qualified person” (ranchers, farmers, and other growers.)
Farm and garden supplies are typically subject to sales tax. There are some exceptions to this rule and series of examples can be found in the Tax Guide for the Agricultural Industry found on the BOE website.
Common items that would be subject to a partial exemption include: irrigation equipment, crop-spraying equipment, trimming tools, root stock, fertilizers, agricultural minerals, cover crops.
What should you do now?
If you think that you paid too much sales or use tax in the last three years you can request a refund from your retailer. You will need to supply them with your resale certificate and evidence that the original purchase should have qualified as a raw material incorporated into a finished product. If you paid use tax (typical when an out of state vendor is used) you can file your claim directly with the BOE by filing form BOE-101. You will need to include the same information described above for a sales tax refund.
If you suspect that you may have overpaid in taxes, we can help evaluate the amount of potential refunds you can obtain and file for reimbursement. Contact our Hayashi Wayland Paso Robles office at 805.226.4155