Publication 27, Drugstores
Application of Tax to Purchases

Under certain circumstances, you are required to pay tax to us on your purchases. This page describes typical situations in which tax may apply to purchases made by your business.

Use tax

If you purchase taxable merchandise for resale (without paying sales tax) and divert the merchandise to some other use, you must report use tax based on your purchase price for the merchandise. The cost of the merchandise should be reported on your tax return under Purchases subject to use tax.

The rate for use tax is the same as the sales tax rate effective for your location.

The sections below describe typical situations in which use tax applies to purchases made by retailers.

Merchandise purchased for resale

Generally, when you purchase merchandise you intend to resell, you do not pay sales or use tax at the time of purchase. Sales tax applies to your subsequent retail sale of the merchandise.

However, if you purchase taxable merchandise for resale but use it for other business or personal purposes, you must report use tax to us. Examples of such use include cigarettes, soap, and other taxable items taken home by an owner; given to friends, associates, or employees; or donated to certain organizations.

Donations to organizations: You are not required to report use tax if you donate property from your resale inventory to a qualified organization, as defined in Regulation 1669, Demonstration, Display, and Use of Property Held for Resale—General. Donations to organizations that do not qualify under this regulation are taxable.

If you paid sales tax to your supplier for items you purchased for business or personal use, but resell the items first, you can take a deduction on your tax return when you report the sale. You may deduct the amount you paid before sales or use tax was added under Cost of tax-paid purchases resold prior to use on your return.

Items used for demonstration and display

Merchandise you use exclusively for demonstration and display while it is held for sale is not subject to use tax, but sales tax applies when the item is sold.

If you use a demonstration or display item for any additional purpose, including personal use, the purchase price must be reported under Purchases subject to use tax on your return. Again, sales tax applies to the subsequent retail sale of the merchandise. For more information, refer to Regulation 1669.

Items purchased from out-of-state retailers

In general, if you purchase taxable merchandise from an out-of-state retailer (without paying California tax) and use the merchandise for a purpose other than for resale, the purchase is subject to use tax and must be reported on your return.

Credit for payment of another state’s tax

If you paid another state’s sales tax on the purchase, you may receive credit for that payment by:

  • Reporting the amount of the purchase on your return under Purchases subject to use tax, and
  • Deducting the amount of tax paid to the other state. Enter the amount under Credit for tax paid to other state(s) on your return. You can only claim a credit up to the amount of California tax due.

Some out-of-state retailers are authorized to collect and pay California use tax. If your sales receipt indicates that the correct amount of California use tax has been collected on your purchase, you do not need to report that purchase on your return.

Please note: You cannot receive credit for sales tax paid to another state if the tax should not have been collected (it was improperly assessed).

Use tax resources

For further information on use tax, please refer to the following publications:

Business supplies and equipment

Purchases of items used in your business, such as display fixtures, equipment, price tags, advertising, bookkeeping, and maintenance materials, are subject to sales or use tax. If purchased from an out-of-state seller who does not charge California use tax, the purchase must be reported on your return under Purchases subject to use tax. If you later sell any of these items (for example, you sell a used fixture), the sale is taxable.

Packaging supplies

You may use a resale certificate to purchase packaging supplies (such as paper bags) that you will use to package merchandise you sell, provided:

  • You supply these items with your sales, and
  • You do not require your customers to return them to you.

You are not required to charge separately for these items or report tax to us when included with the sale of your merchandise. For more information, refer to Regulation 1589, Containers and Labels, or publication 106, Combination Packages and Gift-Wrapping.

Revision October 2026