Sales tax errors and issues can be very costly for taxpayers, especially when adequate books and records are not maintained. Sales tax issues may result in sales tax redeterminations, additional audits, or even a revocation of your sellers permit. The aid of a tax attorney can be crucial in resolving sales tax issues with the best possible outcome.
Sales Tax in California
Sales tax in California is imposed on all California retailers that sell merchandise (considered tangible personal property) within the state. The tax is administered by the CDTFA California Department of Tax and Fee Administration. Retailers are required by law to obtain a seller’s permit and report and pay taxes to the California Department of Tax and Fee Administration.
The tax is calculated based on a business’s gross receipts minus any non-taxable sales. The current state sales tax rate is 6%. Cities are then able to collect their own tax up to 1.75%. When you add special rates in certain cases (up to 3.25%), you can have a total sales tax rate as high as 10.25%. The average total sales tax rate in California is 8.174%.
The revenue collected from sales and use taxes is used to fund road development, schools, parks, and other public services. Thus, the state aggressively pursues payment of sales taxes. The California Department of Tax and Fee Administration employs several thousand individuals tasked with collecting unpaid sales taxes and administering sales tax audits. California sales tax issues can be extremely difficult matters to handle without the help of a tax attorney, especially when a sales tax audit is involved.
California Sales Tax Audits
There are several reasons a business may be flagged for a sales tax audit. Businesses that engage mostly in cash transactions or deal with a large number of exempt sales are more likely to be audited. In some cases, a business can be audited simply because a vendor was found to be in violation of a tax law. Other reasons for an audit include:
- Consistently filing sales and use taxes late
- Failing to report sales and use taxes
- Findings from a previous audit indicating the presence of sales tax problems
- Operating in an industry with a history of sales tax non-compliance
The auditor will be tasked with finding evidence of unreported taxable income. The auditor will be looking to find innocent errors or prove willful misrepresentation and evasion.
What to Expect From a California Sales Tax Audit
The auditor may choose to work on your premises or from a field office. If the auditor works on the premises of your business, you are expected to provide a desk with adequate lighting to work from. During the audit, the auditor will want to examine book sales and bank deposits to compare the numbers with sales reported on the sales tax returns. The auditor will likely request access to the following documents:
- Income tax returns
- The general ledger
- The sales ledger
- Purchase and sale journals
- Bank statements
- Depreciation Schedules
One of the first things you should do to prepare for an audit is collect and review all of the requested documentation for the designated period being examined. It’s important you also carefully read the audit notice and respond within the appropriate time frame. The notice will outline exactly which items the auditor seeks to review. The auditor will begin with preliminary tests and examinations, which will later be followed by more sophisticated statistical sampling.
It is never advised to make contact with a sales tax auditor without first speaking to a tax attorney. Issues can escalate very quickly because the California Department of Tax and Fee Administration can and will share information with the IRS and the Franchise Tax Board. A simple sales tax audit can very easily become an IRS criminal investigation.
How RJS LAW Can Help
The attorneys at RJS Law can assist in resolving state sales tax issues and ensuring sales tax audits run smoothly. Our attorneys can review records ahead of time to determine if records are adequate. If reconstruction of records is needed, we’ll work with your CPA to advise on document reconstruction. We’ll also fight to reduce or eliminate any proposed additional sales taxes if you feel the results of the audit are incorrect. Call or fill out a contact form to schedule a complimentary case evaluation. Our attorneys will review your case to determine if we can help you protect your taxpayer rights.
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