CDTFA Sales Tax Audits

Car dealerships, like any other retailer in California, must file sales tax returns and pay sales taxes for retail sales of goods.  Unlike most retailers in California, car dealerships have two agencies watching them.  Just like other retailers, car dealerships may have their sales taxes audited by the California Department of Tax and Fee Administration (CDTFA).  In addition, the California Department of Motor Vehicles (DMV) also monitors car dealerships’ sales, which subjects car dealerships to extra scrutiny during CDTFA sales tax audits.

A recent Office of Tax Appeals (OTA) case highlights this extra scrutiny car dealerships face.  According to the  OTA’s Eddie’s Auto World  opinion, a car dealership in Fresno reported about $1.5 Million of automobile sales on its sales tax returns during a sales tax audit period.  According to the OTA opinion, the DMV recorded over $3.8 million of auto sales for the same period.  Unfortunately for Eddie’s Auto World, the rest is history.  The Taxpayer in the case ended up owing over $200,000 of taxes and interest.  (The OTA opinion makes no mention of penalties even though it is highly likely that an auto dealership which under-reports over $2 million in sales would also incur penalties.)

According to the OTA opinion, the Taxpayer in the Eddie’s Auto World Case did not provide much documentation to the auditor.  The OTA opinion states the Taxpayer merely provided copies of federal income tax returns and a few deal jackets. (The CDTFA typically requests documents such as bank statements, ledgers, and other business records at an audit.)  The Taxpayer attempted to argue that the DMV’s records were inaccurate with regards to the sales prices of the cars the Taxpayer sold.  At the end of the day, the perceived lack of cooperation by the Taxpayer hurt its credibility with CDTFA and OTA. 

Auto dealerships need to be especially careful when they file their tax returns and pay their sales taxes.  Unlike most businesses, they have two agencies monitoring their sales.  Discrepancies between sales tax returns and DMV sales are likely to trigger sales tax audits and additional assessments which may include interest as well as penalties.   The Taxpayer in Eddie’s Auto World attempted to argue the DMV records were inaccurate, but it lacked the paper trail needed to support its claims. 

It goes without saying that good record keeping is essential for car dealerships (as well as all other types of businesses.).  Perhaps Eddie’s Auto World had a good explanation for its sales tax reporting.  Unfortunately for Eddie’s Auto World, the CDTFA and OTA were not buying any explanation because Eddie’s Auto World did not provide adequate documentation.  If there is a discrepancy between sales reported to the DMV and sales reported by a car dealership on its CDTFA returns, that discrepancy must be well documented. 

RJS LAW helps auto dealerships and other businesses with CDTFA sales tax audits as well as other tax related matters.  Contact us at RJS LAW or by phone at 619-595-1655 for a free consultation.  Out tax attorneys have decades of combined experience working with the CDTFA as well as all other taxing authorities.  We are here to help. 

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