Filing your Sales and Use Taxes: Deductions

Deductions

Sales to Other Retailers for the Purposes of Resale

Enter your total sales to other sellers who submitted resale certificates to you for their purchases.

This transaction is not subject to tax and will be subtracted from the amount entered on the Total Gross Sales line. You cannot claim a deduction for a transaction unless it has been reported on the Total Gross Sales or Purchases Subject to Use Tax lines on the Sales and Purchase Information Page on this Return or a previous return. If you did not report the original sale, you cannot claim a deduction. You must maintain records that support all claimed deductions.

  • In general, you can accept resale certificates from other sellers who are buying property to resell in the regular course of business. If you obtain a timely and valid resale certificate, taken in good faith, tax will not apply to your sale.
  • To be valid, resale certificates must contain specific information. For more information, see Regulation 1668, Sales for Resale. You can verify the validity of seller’s permits by calling the Board’s Seller’s Permit Verification service at 1-888-225-5263 or by visiting our website, www.boe.ca.gov.

Nontaxable Sales of Food Products

Enter your nontaxable sales of food products sold for human consumption.

This transaction is not subject to tax and will be subtracted from the amount entered on the Total Gross Sales line. You cannot claim a deduction for a transaction unless it has been reported on the Total Gross Sales or Purchases Subject to Use Tax lines on the Sales and Purchase Information Page on this Return or a previous return. If you did not report the original sale, you cannot claim a deduction. You must maintain records that support all claimed deductions.

  • Whether food product sales are taxable depends on many conditions, including who makes the sale, where the sale occurs, who the customer is, and what is sold. For example, the following sales are generally taxable and should not be deducted:
    • Sales of alcoholic and carbonated beverages
    • Sales of hot prepared food products
    • Sales of meals or food sold for consumption at your place of business or sold for consumption in a place where admission is charged.
  • For more information on food sales see Regulation 1602, Food Products, or Regulation 1603, Taxable Sales of Food Products. Vending machine operators should see Regulation 1574, Vending Machine Operators.

Nontaxable Labor

Enter charges for installing premanufactured property or for repairing or reconditioning property to restore it to its original use.

This transaction is not subject to tax and will be subtracted from the amount entered on the Total Gross Sales line. You cannot claim a deduction for a transaction unless it has been reported on the Total Gross Sales or Purchases Subject to Use Tax lines on the Sales and Purchase Information Page on this Return or a previous return. If you did not report the original sale, you cannot claim a deduction. You must maintain records that support all claimed deductions.

  • Labor charges for making or fabricating a new product (such as labor charges for making a ring or furniture), or for assembling a product, are generally taxable and should not be deducted. Tax applies even if your customer provides the property that you fabricate.
  • For more information see Regulation 1546, Installing, Repairing, Reconditioning in General.

Sales to the United States Government

Enter sales made to:

  • The United States government or its unincorporated agencies and instrumentalities, such as the following federal departments: Treasury, Interior, Agriculture, or Defense
  • Any incorporated agency or instrumentality of the United States wholly owned by either the United States, or by a corporation wholly owned by the United States
  • The American Red Cross, its chapters and branches
  • Federal Reserve banks, federal credit unions, federal land banks, and federal home loan banks.

This transaction is not subject to tax and will be subtracted from the amount entered on the Total Gross Sales line. You cannot claim a deduction for a transaction unless it has been reported on the Total Gross Sales or Purchases Subject to Use Tax lines on the Sales and Purchase Information Page on this Return or a previous return. If you did not report the original sale, you cannot claim a deduction. You must maintain records that support all claimed deductions.

  • Sales made to the State of California or to cities and counties and local governments in the state are generally taxable and should not be deducted. They are treated like any other sale.
  • For more information see Regulation 1614, Sales to the United States and Its Instrumentalities.

Sales in Interstate or Foreign Commerce

Enter sales that are exempt from tax as interstate or foreign commerce (sales involving shipments or deliveries from California to points outside this state).

This transaction is not subject to tax and will be subtracted from the amount entered on the Total Gross Sales line. You cannot claim a deduction for a transaction unless it has been reported on the Total Gross Sales or Purchases Subject to Use Tax lines on the Sales and Purchase Information Page on this Return or a previous return. If you did not report the original sale, you cannot claim a deduction. You must maintain records that support all claimed deductions.

  • For a sale to be exempt, the sales agreement or contract must require the property to be shipped to an out-of-state point, and you must either
    • Use your company vehicle (or other conveyance operated by your business) to ship the property to that location, or
    • Deliver the property to a carrier, customs broker, or forwarding agent for shipment outside this state.
  • For more information see Regulation 1620, Interstate and Foreign Commerce.

Sales Tax

Enter an amount on this line only if the amount you reported on the Total Gross Sales line on the Sales and Purchase Information Page includes California sales or use taxes. Enter only the tax amounts that are included on the Total Gross Sales line.

  • For more information see Regulation 1700, Reimbursement for Sales Tax.

Bad Debt – Losses on Taxable Sales

Enter bad debt losses, as described below.

  • If you have reported a taxable sale and have been unable to collect payment for the sale, you may take a deduction for the bad debt.
  • Bad debts may take the form of
    • Checks that have been returned to you unpaid by the purchaser’s bank and which you have determined to be uncollectible, or
    • Amounts from charge or credit sales that you have determined to be uncollectible.
  • The bad debts must be charged off for income tax purposes, or, if you are not required to file income tax returns, the bad debts must be charged off in accordance with generally accepted accounting principles.
  • Enter only the amount of the sale before tax. For example, if you sold merchandise for $15 plus sales tax and were unable to collect any amount for the sale, you would claim $15 as a deduction.
  • If you claim a bad debt deduction and later recover payment, you must report the payment on the tax return filed for the period in which the recovery payment was made.
  • You must adjust the amount you report for transactions that occurred during a period when the state or county tax rates were different than the current rates. For tax rates see California City and County Sales and Use Tax Rates.
  • For more information see Regulation 1642, Bad Debts.

Bad Debt for Motor Vehicle Fuel (MVF) Sales

Enter the amount of bad debt(s) from the sales of Motor Vehicle Fuel (MVF). Do not include the sales tax collected in the amount claimed. This amount will automatically be populated to the exemption schedule to properly adjust the measure of sales tax due.

Bad Debt for Diesel Fuel Sales

Enter the amount of bad debt from the sales of diesel fuel. Do not include the sales tax collected. This amount will automatically be populated to the exemption schedule to properly adjust the measure of sales tax due.

Bad Debt on Manufacturing and Research and Development Equipment Sales

Enter the amount of bad debt(s) from the sales of manufacturing and research and development equipment. Do not include the sales tax collected. This amount will automatically be populated to the exemption schedule to properly adjust the measure of sales tax due.

Cost of Tax-Paid Purchases Resold Prior to Use

Enter cost of tax-paid purchases resold prior to use as described below.

This transaction is not subject to tax and will be subtracted from the amount entered on the Total Gross Sales line. You cannot claim a deduction for a transaction unless it has been reported on the Total Gross Sales or Purchases Subject to Use Tax lines on the Sales and Purchase Information Page on this Return. If you did not report the original sale, you cannot claim a deduction. You must maintain records that support all claimed deductions.

  • You may claim a deduction on this line if you
    • Paid California sales or use tax when purchasing goods or merchandise, and
    • Sold the property without first using it (other than retaining, demonstrating, or displaying it while holding it for sale in the regular course of business).
  • Enter only the amount of the purchase price before tax. For example, if the property was sold to you for $15 plus tax, you would claim only $15 as a deduction.
  • You must take this deduction in the reporting period during which you made the sale (otherwise, you must file a claim for refund of the tax).
  • You must adjust the amount you report for purchases that occurred during a period when the state or county tax rates were different than the current rates. For tax rates see California City and County Sales and Use Tax Rates.
  • For more information see Regulation 1701, Tax-Paid Purchases Resold.
  • If you paid California Sales or Use Tax on Motor Vehicle Fuel and/or Diesel and you need to claim a tax recovery deduction (i.e. Cost of Tax-Paid Purchases Resold Prior to Use), please follow the instructions below.

Purchases Resold Prior to Use for Motor Vehicle Fuel (MVF) Sales

Enter the sales amount for tax-paid Motor Vehicle Fuel (MVF) that was resold prior to use. Do not include the amount of sales tax paid in the amount claimed. This amount will automatically be populated to the exemption schedule to properly adjust the measure of sales tax due.

If the return type you are filing does not give you the option to enter your MVF purchases after entering an amount under the Cost of Tax-Paid Purchases Resold Prior to Use line, please follow the detailed instructions below:

To calculate your allowable Cost of Tax-Paid Purchases Resold deduction for MVF (gasoline) purchases, you will need to know:

  1. The total cost of your gasoline purchases
  2. Tax rate of the fuel station’s location

After you have gathered this information follow the steps below. To illustrate we included an example that assumes $30,000.00 in gasoline purchased at a location with an 8.50% tax rate.

Purchases Resold Prior To Use for Diesel Fuel Sales

Enter the sales amount for tax-paid Diesel Fuel that was resold prior to use. Do not include the amount of sales tax paid in the amount claimed. This amount will automatically be populated to the exemption schedule to properly adjust the measure of sales tax due.

If the return type you are filing does not give you the option to enter your Diesel purchases after entering an amount under the Cost of Tax-Paid Purchases Resold Prior to Use line, please follow the detailed instructions below:

To calculate the correct amount of your allowable Cost of Tax-Paid Purchases Resold deduction for diesel fuel purchases, you will need to know:

  1. The total cost of your diesel fuel purchases
  2. Number of gallons of diesel fuel purchases
  3. Tax rate of the fuel station’s location.

After you have gathered this information follow the steps below. To illustrate we included an example of 5,000 gallons of diesel fuel purchases totaling $20,000.00, purchased at a location with an 8.00% tax rate.

Returned Taxable Merchandise

Enter amounts you credited or refunded to customers for returned taxable merchandise, as described below.

This transaction is not subject to tax and will be subtracted from the amount entered on the Total Gross Sales line. You cannot claim a deduction for a transaction unless it has been reported on the Total Gross Sales or Purchases Subject to Use Tax lines on the Sales and Purchase Information Page on this Return or a previous return. If you did not report the original sale, you cannot claim a deduction. You must maintain records that support all claimed deductions.

  • You can take this deduction only if
    • You returned or credited to your customer the full sales price, including sales tax charges, and
    • The customer, in order to obtain the refund or credit, is not required to purchase other property at a price greater than the amount charged for the property returned.
  • Claim only the amount of the sale before tax. For example, if the returned merchandise had been sold for $15 plus sales tax, you would claim only $15 as a deduction.
  • You must adjust the amount you report for transactions that occurred during a period when the state or county tax rates were different than the current rates. For tax rates see California City and County Sales and Use Tax Rates.
  • For more information see Regulation 1655, Returns, Defects and Replacements.

Returned Taxable Sales on Manufacturing and Research and Development Equipment

Enter the amount you credited or refunded to customers for returned taxable merchandise on the sales of manufacturing and research and development equipment. Do not include the sales tax. This amount will automatically be populated to the exemption schedule to properly adjust the measure of sales tax due.

Tax Recovery Deductions/Adjustment

If the original transaction(s) (or any portion of them) occurred prior to January 1, 2017, please enter the amount in the field provided. Due to the expiration of the temporary statewide one quarter percent (0.25) tax increase on December 31, 2016, claiming a tax recovery deduction (Bad Debts, Cost of Tax Paid Purchases Resold Prior to Use, or Returned Merchandise) for the period prior to January 1, 2017 will result in a 0.25% tax recovery adjustment.

This adjustment is necessary to ensure that you get the proper credit for the tax amount you previously paid on the original transaction(s).

For example:
A piece of equipment originally sold for $10,000 and sales tax of $750 (7.50%) was collected and paid to the BOE. The merchandise was returned after the tax rate decrease of January 1, 2017. In order to recoup the $750 sales tax paid, you would take a returned merchandise deduction for $10,000 in the next return period. Because of the tax rate change, your sales tax credit would be calculated at the lower rate (7.25%) resulting in a credit of $725 rather than the $750 you had previously paid. The return will be adjusted by subtracting 0.25% of the $10,000 ($25) from the amount due. The amount will appear on your review and confirmation pages as a “Tax Recovery Adjustment.”

Cash Discounts on Taxable Sales

Enter the amount of the cash discount you gave a customer on a taxable sale.

  • You can claim a deduction on this line only if you reported the full (undiscounted) selling price on the Total Gross Sales line on the Sales and Purchase Information Page. Do not use this line if you reported the discounted selling price on the Total Gross Sales on this return or a previous return. In addition, you must ensure that you do not collect from your customer more tax than the amount due on the discounted price. If you collect more than the amount due on the discounted price, you cannot claim this deduction.
  • You must adjust your total for this line if any of the transactions occurred during a period when the state or county tax rates were different than the current rates. For tax rates see California City and County Sales and Use Tax Rates.
  • For more information see Regulation 1671, Trading Stamps and Related Promotional Plans and/or Regulation 1700, Reimbursement for Sales Tax.

Cash Discounts on Manufacturing and Research and Development Equipment Sales

Enter the amount of cash discount you gave a customer on the sales of manufacturing and research and development equipment. Do not include the sales tax. This amount will automatically be populated to the exemption schedule to properly adjust the measure of sales tax due.

Reimbursement Cost Offset for Lumber Products Assessment

Enter the amount of reimbursement cost as explained below:

If you are a retailer required to collect the 1% lumber products assessment, you may retain $250 per retail location for start-up costs. You may claim an offset for start-up costs up to the amount of the lumber products assessment reported (computed as lumber transactions × 1%). Any remaining allowable start-up cost may offset your reported lumber products assessment on subsequent returns until the allowable reimbursement cost ($250 × the number of retail locations) is taken.

A location is the business location registered under the retailer’s seller’s permit as of January 1, 2013, where lumber or engineered products subject to the assessment are sold. If you started your business or opened a location after January 1, 2013, you cannot retain reimbursement for that location.

Other Deductions

Please note deductible transactions do not include your business expenses. Deductible transactions are nontaxable sales that were included in your “Total Gross Sales”.

Select a description of your deduction from the drop down menu or type in the description on one of the free form text lines.

Enter the amount of your deduction.

  • Examples of nontaxable transactions that may be deductible include the following:
    • Sales of Medical Marijuana. The exemption only applies to retail sales on or after November 9, 2016, of medical cannabis, medical cannabis concentrate, edible medical cannabis products, or topical cannabis as those terms are defined in the Business and Professions Code section 19300.5. To obtain the exemption, qualified patients (or their primary caregivers) must present their valid Medical Marijuana Identification Card issued by the California Department of Public Health and a valid government issued identification card at the time of purchase.
    • Sales by pharmacists of prescription medicines for use by humans. For more information see Regulation 1591, Medicines and Medical Devices.
    • Transportation charges for delivering goods to a purchaser by an independent carrier (the transportation charges must be separately stated on the invoice). If you charge more for delivery than your actual costs, the added amount is subject to tax and cannot be deducted. For more information see Regulation 1628, Transportation Charges.
    • Sales of animals, seeds, plants and fertilizer, used as, or used to produce, food for human consumption. For more information see Regulations 1587, Animal Life and Feed, and 1588, Seeds, Plants and Fertilizers.
  • For more information see publication 61, Sales and Use Taxes: Exemptions and Exclusions.
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