California Sales Tax Problems & Audits
Our tax attorneys often represent clients with California Sales Tax Problems. In the State of California sales taxes are collected by the State Board of Equalization which is also known as the SBE or the BOE. 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 BOE also administers the California use tax. The BOE employs a staff of several thousand. 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.
When the SBE 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 than examined, and that information can be used in conjunction with sale 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 California sales tax reported on the returns and comparing the claimed sales for resale to resale certificates.
Records generally requested by the SBE tax auditor include:
- 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 lading, or other documents supporting claimed exempt sales.
- Copies of the sales tax returns filed with the SBE 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 SBE that gross receipts were understated for California sales tax purposes may also lead to a conclusion that gross receipts on a taxpayer's state and federal income tax returns are also understated. Since the SBE 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 SBE determines that $200,000 of gross receipts have gone unreported that would result in sales taxes due of approximately $17,000 depending on the county in which you are located. 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 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 the the sales tax audit supervisor, and work to reduce any proposed sales tax bill. If that conference doesn't result in a satisfactory result, as your sales tax attorneys we may meet with the BOE District Principal Auditor to try and minimize your sales tax problem.
If agreement in a sales tax audit can not be reached at this point then the SBE 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 BOE there is an opportunity to settle the case with the BOE settlement division. Many sales tax problems are resolved with the BOE settlement division. An informal hearing with an SBE hearing officer may also result in a resolution of a California sales tax audit.
If a petition is not filed with the State Board of Equalization 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 5 member Board of Equalization. There are limited exceptions to this rule, and even if you have failed to file a timely petition with the State Board of Equalization 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 5 member State Board of Equalization is unsucessful then 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 BOE 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 can not pay the sales taxes it owes, the BOE 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 paying of the corporate sales taxes. This can include officers, and shareholders of the corporate taxpayer. 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 BOE has made errors in its determination. However, even if the corporation is liable if the SBE 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 the corporation in the sales tax audit.
A California sales tax audit, and its appeal is a very complicated process requiring a knowledge of the California sales tax laws, as well as an understanding of the procedures of the SBE. If your case must go to court then an understanding of state court rules and procedures, 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.