The Office of Tax Appeals (OTA) recently issued opinions reviewing CDTFA gas station sales tax audits.  (You can read the opinions here and here).  The OTA opinions describe the CDTFA using national gas price averages to measure the audited sales prices of gas sold at local gas stations.  These opinions appear troubling for gas station owners as they believe the techniques used by the CDTFA to audit gas stations are flawed. 

The CDTFA often uses various ratios to indirectly determine a taxpayer’s total taxable sales.  For example, they often use anticipated markup percentages to determine what a particular business’ total sales should be based on an expected markup.  If a business purchased goods at a wholesale cost of $100,000 during an audit period and is “expected” to have a 50% markup, the CDTFA will determine that business should have had $150,000 in sales during the audit period.  If the business reported $130,000 in sales during that audit period, the CDTFA will determine the business had $20,000 of unreported sales using this markup technique.  As the recent OTA cases show, the CDTFA may use government fuel price figures to determine what the gas stations’ fuel sales are “supposed” to be and use those fuel price figures to “find” under-reported fuel sales. 

In both recent cases, the CDTFA used Department of Energy (DOE) national fuel price averages to determine the gas stations’ total fuel sales.   The CDTFA compared the gas stations’ prices at the date of the audit to the DOE prices for the same time.  They used the ratio of the gas stations’ prices to the DOE national average to extrapolate the total fuel sales over the course of the audit period.  The CDTFA determined fuel sales by the formula below:

Fuel sales (for week) = (DOE average for week) x (gallons of fuel sold) x (price at date of audit/DOE average at date of audit)

There are of course problems with the CDTFA’s method.  For starters, fuel prices can vary throughout the country.  The national average does not reflect these local variances.  The adjustments the CDTFA makes by comparing the gas stations’ prices on the day of the audit do not reflect why any particular gas station’s prices on a particular day may vary from the national average.  For example, California gas stations sell different blends of fuel during different seasons.  A variation from the national average that can be attributed to a fuel blend on a particular day does not account for all price variations on all days that can be due to numerous factors such as local weather conditions.

However, gas station owners can protect themselves from unfair audit results.  One way to protect themselves is to document their daily fuel prices.  Point of Sale (POS) software may be able to document fuel prices.  Another “low tech” solution may be to simply photograph advertised gas prices and save the photographs of their gas prices.   

At RJS LAW, we help gas stations as well as other businesses with CDTFA Audits and any related tax issues.  We have decades of combined experience helping clients with their tax problems.  Contact RJS LAW on the web or call us at 619-595-1655 for a free consultation. 

Written by Joseph Cole, Esq., LL.M.