CDTFA Sales Tax Audit

This installment of our Tax and Vice Blog will discuss the turnstile approach the CDTFA is using in many sales tax audits of cannabis dispensaries.  A couple of recent California Office of Tax Appeals cases (Appeal of Divine Wellness Center and Appeal of Mutual Medicinal Collective) highlight the turnstile approach the CDTFA is using to audit cannabis dispensaries during a CDTFA Sales Tax Audit.  Under the turnstile approach, the auditor of a dispensary counts the number of patrons entering a dispensary and extrapolates the total taxable sales a dispensary makes based on the number of people the auditor counts entering a dispensary.

We previously blogged about another case in which the CDTFA used a turnstile approach to an audit and the problems with the turnstile approach.  The turnstile method is problematic and prone to systematic errors.  Among other things, it assumes the number of people the auditor counts entering a facility over a short period of time is representative of an entire audit period which can span a number of years.  It also makes troublesome assumptions that each person who enters a dispensary purchases a certain amount of product. 

There are measures cannabis dispensaries can put in place to defend themselves against potential future turnstile audits. 

1. Keep good records.  The CDTFA resorted to turnstile audits in the above OTA cases because the dispensaries did not maintain and provide the auditors with adequate records.  Keeping thorough and meticulous records as well as having a Point of Sale (POS) system may keep the CDTFA from having to resort to a turnstile audit.
2. The Right Level of Cooperation.  All taxpayers have to walk a tightrope when under audit.  They have to balance their legitimate concerns for privacy and self-preservation, with their desire to efficiently comply with their legal obligations and truthful responses while under audit. In many cases involving turnstile audits, the auditor resorts to the turnstile approach because the taxpayer is providing little or no cooperation.  In other words, the auditor uses the turnstile approach because the taxpayer did not provide the auditor with information or documentation the auditor could use to apply a different approach.  An experienced tax attorney can help a taxpayer appropriately cooperate with an audit while simultaneously representing the taxpayer’s interests and protecting their rights. 
3. Install a turnstile?  A turnstile counts the patrons entering the dispensary and may  provide a potential defense to dispensary owners.  Turnstile data can provide actual proof of the number of patrons entering the dispensary and  provide a more accurate number (for better or for worse) than the turnstile counts produced by the CDTFA auditor.       

At RJS LAW, we help all types of businesses with tax issues including audits, collection matters, and tax matters. Please feel free to contact us on the web or at 619-595-1655 for a free consultation.

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