Sales tax is administered and collected by the California Department of Tax and Fee Administration (CDTFA). Up until 2018, the State Board of Equalization (SBOE) administered and collected sales tax in California. To ensure compliance, the CDTFA conducts field audits regularly for a variety of businesses including manufacturers, construction contractors, vehicle dealerships, bars, restaurants, distributors, and many others. Sales tax audits are usually conducted on the premises of a business and are measured principally by looking at gross receipts from business sales subject to sales tax. In addition, Sales Tax Auditors use other techniques to determine the amount of sales tax owed, some of which are specific to certain industries and others that compare the amount of sales on the taxpayer’s books to the amount of sales tax indicated on a business’ income tax return. Sales tax audits are often extremely time consuming because of the volume of records requested and the thoroughness of the examination. Auditors may examine any number of the following:
- Cash receipts
- Disbursement records
- Purchase journal, invoices, and orders
- Accounts receivable
- General ledger
- Register tapes
- Balance sheets
- Bank statements
- Resale certificates
- Exemption certificates
- Any other documents or summary records of business operations which substantiate the taxpayers sales tax payments.
The State Board of Equalization also has a multitude of industry specific sampling tests that auditors use to determine whether additional tax is owed. For example, restaurants and bars may be subject to pour and measurement tests calculating tax owed based on the average size of a hamburger and the amount of alcohol being poured into every drink.
In addition, if a corporation cannot pay the amount of sales tax that it is assessed in a re-determination, the CDTFA may hold individuals personally liable for the amount of tax owed. Often the board will assess officers, directors, shareholders, and any other person who supervised the filing of a sales tax return or the paying of sales tax. There is no requirement that the person assessed be a shareholder or officer of the company, and therefore CFOs and controllers may be held liable for sales tax owed.
Sales tax audits can be particularly costly to taxpayers, especially those that do not maintain adequate books and records. In addition to the additional tax due, sales tax redeterminations may also lead to information-sharing with the IRS and the Franchise Tax Board. This could potentially trigger other audits or lead to a presumption that income has been understated. In addition, the CDTFA can revoke your sellers permit, shutting down your business operations by making it a crime to continue to resell goods. If you continue sales, you may be charged with a misdemeanor.
Sales tax issues may be extremely complicated. If you have any questions or if we can further assist you, please contact one of our offices. We have offices in Beverly Hills, Irvine, North County San Diego, and Downtown San Diego to serve you.
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