California Sales Tax Problems & Audits
Our tax attorneys often represent clients with California Sales Tax Problems. In the state of California, Sales Taxes used to be collected by the State Board of Equalization, which was also known as the "SBE" or "BOE". However, beginning in July of 2017, the Sales Tax functions of the SBE were transferred to a brand new agency known as the California Department of Tax and Fee Administration (CDTFA).
The California Sales Tax is imposed on retailers for the privilege of selling tangible personal property at retail. The California Sales Tax is measured by gross receipts from retail sales. The CDTFA (formerly the BOE) also administers the California Use Tax. The CDTFA employs a staff of several thousand, most of whom were transferred in from the BOE. They conduct Sales Tax Audits and collect unpaid California Sales and Use taxes. The BOE is headed by a five-member board consisting of four elected members, each of whom represents a district, and the State Controller. However, the five-member Board no longer hears California Sales and Use Tax Appeals. Instead, Appeals are heard by the Office of Tax Appeals (OTA).
When the CDTFA conducts a Sales Tax Audit, it uses a variety of different techniques depending on the type of business under audit. For example, when performing a Sales Tax Audit of a bar, the auditor may conduct an undercover "pour test" to determine the amount of alcohol that is poured in each drink. Purchase records are then examined, and that information can be used in conjunction with sales prices to determine the amount of sales. No matter what type of business is under audit, preliminary examination by the Sales Tax auditor will generally include comparing the total sales recorded on the taxpayer's books to the total sales reported on the taxpayer's Sales Tax returns; comparing the total sales recorded on the taxpayer's books to the total sales on the taxpayer's income tax returns; comparing the California Sales Tax reimbursement the taxpayer collected to the Calfornia Sales Tax reported on the returns and comparing the claimed sales for resale to resale certificates.
Records generally requested by the auditor from the California Department of Tax and Fee Administration is the same as would have previously been requested by an SBE tax auditor, and includes:
- Books of account including the taxpayer's income statements, balance sheets, general ledgers, and other summary records of the business operations, including state and federal income tax returns.
- Original documents that support the entries to the taxpayer's books, such as sales and purchase invoices, purchase orders, contracts, bank statements, and any other documents that result from the business operations.
- Resale certificates, exemption certificates, bills of landing, or other documents supporting claimed exempt sales.
- Copies of the sales tax returns filed with the SBE or the CDTFA, and the working papers and schedules used to prepare the sales tax returns.
Many sales tax problems are due to a lack of adequate records. Our Sales Tax Lawyers can help to determine if your records are adequate, and advise you and your CPA on the reconstruction of records.
A Sales Tax Audit determination by the CDTFA that gross receipts were understated for California Sales Tax purposes may also lead to a conclusion that gross receipts on the taxpayer's state and federal income tax returns are also understated. Since the CDTFA may share information with both the IRS and the California Franchise Tax Board, it is important to dispute all erroneous sales tax audit adjustments even if at first it doesn't appear cost effective. For example, if the CDTFA determines that $200,000 of gross receipts have gone unreported, that would result in Sales Taxes due of approximately $18,000 depending on the county in which the sales occurred. However, a failure to report $200,000 in gross receipts for federal and state income tax purposes could mean additional income taxes due of $80,000 or more, plus interest and penalties.
If you don't agree with the results of a California Sales Tax Audit, there are many opportunities for our California Sales Tax lawyers to resolve your Sales Tax problem. For example, when the Sales Tax Audit is complete, the auditor will arrange to hold an exit conference. The Sales Tax auditor's supervisor may also attend. At this conference, the Sales Tax auditor will explain any proposed additional sales taxes. As your Sales Tax attorneys, we will meet with the Sales Tax Audit Supervisor, and work to reduce any proposed Sales Tax bill. If that conference does not end with a satisfactory result, as your Sales Tax Attorneys we may meet with the CDTFA District Principal Auditor to try and minimize your sales tax problem.
If agreement in Sales Tax Audit cannot be reached, at this point the CDTFA will issue a Notice of Determination. As your Sales Tax Attorneys, we can file a petition on your behalf, but we only have 30 days to file. Once the petition is filed with the CDTFA, there is an opportunity to settle the case with the CDTFA's settlement division. Many Sales Tax problems are resolved with the CDTFA settlement division. An informal hearing with a CDTFA hearing officer may also result in a resolution of a California Sales Tax Audit.
If a petition is not filed, then the Notice of Determination will become final, and you will be required to pay the full amount of the claimed liability before you can file a claim for refund, and have an opportunity to have your case heard by the Office of Tax Appeals. The five-member Board of Equalization used to hear these appeals, but that is no longer the case. There are limited exceptions to this rule, and even if you have failed to file a timely petition with the CDTFA, all is not lost and you should consult with our Sales Tax Attorneys to discuss how your Sales Tax problem can be resolved.
If an appeal to the Office of Tax Appeals is unsuccessful, in order to further dispute the Sales Tax Audit, the Sales Tax must be paid in full and a timely refund claim must be filed. After the refund claim is denied, or the CDTFA fails to act for 6 months, our Sales Tax attorneys can file a suit in State Superior Court to obtain a refund.
If a corporate taxpayer cannot pay the Sales Tax it owes, the CDTFA may issue a so-called "dual determination" in which it assesses the unpaid Sales Tax against the persons in control of, or supervising the filing or payment of the corporate Sales Taxes. This can include officers and shareholders of the corporate taxpayer. This is the same procedure that the SBE used to follow. There is no requirement that an individual be a shareholder for a dual determination to be made. Thus, non-owners, including controllers or CFOs, can be held personally liable for corporate Sales Taxes. This is one more reason why it is important to dispute a Sales Tax Audit if the CDTFA has made errors in its determination. However, even if the corporation is liable, if the CDTFA wants to go after the individual shareholders or officers, it must first issue a separate Notice of Determination, and the shareholders or officers will have similar appeal rights to those afforded to the corporation in the Sales Tax Audit.
A California Sales Tax Audit and its appeal are very complicated processes requiring a knowledge of the California Sales Tax Laws, as well as an understanding of the procedures of the CDTFA and the Office of Tax Appeals. If your case must go to court, then an understanding of state court rules and producers, along with the rules of evidence are required. Our California Sales Tax Attorneys can represent you from beginning to end with your Sales Tax problems.
Call us today at 800.380.Tax Litigator or contact us online.