CDTFA FAQ
Some of the most frequently asked questions RJS LAW addresses when advising clients on CDTFA California Department of Tax and Fee Administration matters | CDTFA FAQ
My business is being audited by the CDTFA. What is the CDTFA looking for? CDTFA FAQ
The CDTFA is generally looking for unreported sales. The CDTFA is also looking to verify non-taxable sales were really non-taxable. For example, the CDTFA will want to verify non-taxable food sales or non-taxable wholesale sales reported on a sales tax return were indeed non-taxable food sales or non-taxable wholesale sales.
What kinds of documents is the CDTFA going to look at? CDTFA FAQ
The CDTFA usually looks to business records such as tax returns, Point of Sale (POS) date, credit card records, bank statements, and other business records. It will also look to invoices and other records a business has of purchases a business may make from its suppliers.
My business has a high volume of sales. Is the CDTFA going to scrutinize every sale?
The CDTFA often does not look at every single transaction a business engages in because it would not be practical in many instances. The CDTFA may take a sample and use that sample to verify all the sales in a particular period. For example, the CDTFA may look to the sales occurring over a one-week period and use that one-week period to verify a one-year period.
The CDTFA Audit claims I made sales that were much higher than the sales my business reported on its return. There is no record of these sales occurring. Can the CDTFA do that?
The CDTFA can make estimates of a business’ total sales based on evidence that may not be in a business’ records. For example, the CDTFA can estimate total sales by assuming the business sold the wholesale inventory it purchased at a particular markup. The CDTFA can also estimate a business had unreported cash sales if the ratio of credit card sales to total sales is deemed too low. In many cannabis tax audits, the CDTFA has estimated total sales by counting the number of patrons that entered a cannabis dispensary over a particular period. Courts have often approved CDTFA estimates, particularly when businesses have inadequate records.
The CDTFA issued an audit determination. Can I appeal the audit?
Appeals are available before the CDTFA and can be heard before the California Office of Tax Appeals (OTA). The CDTFA also has a settlement process where taxpayers can reach a settlement with the CDTFA before a hearing with the OTA.
My business provides services. Does that mean my business has to pay sales taxes?
The CDTFA imposes sales taxes on the sale of tangible personal property. Services are not subject to CDTFA sales tax. However, sometimes service providers often need to pay sales taxes if their services involve the sale of tangible personal property. For example, auto mechanics must pay sales taxes for auto parts they sell to their customers.
A big portion of my audit bill was interest and penalties. Can I do something about that?
Some CDTFA penalties can be abated for reasonable cause. A taxpayer will not only have to show they had a good reason for the penalties, but the taxpayer may also have to show the taxpayer experienced a circumstance beyond its control such as a severe illness. Penalties can also be mitigated by promptly making arrangements with the CDTFA to pay off balances.
My corporation or LLC owes taxes to the CDTFA. Can I be held personally liable?
The CDTFA has dual determinations where a business owner or some other person having responsibility over a business can be held personally responsible for unpaid sales taxes and some other taxes. In order for an individual to be personally liable for a corporate or LLC debt, the business must be closed and the business must have collected sales tax from its customers and failed to remit the sales tax to the EDD.
I have an online business located outside of California. I make a small number of sales to a few customers in California. Do I have to pay California sales tax?
You might have to pay California sales taxes and file California sales tax returns. If you sell to California exclusively through a marketplace facilitatory such as Amazon, Amazon may be taking care of your business’ sales tax obligations for you. If your business has over $500,000 of sales per year within California, your business may be liable for California sales tax. Your business may also be liable for California taxes (even if it sells less than $500,000) if it creates a nexus in California by having employees or agents operating within California or storing goods in California.
The CDTFA found my business had significantly under-reported its sales. Does this mean I will have problems with the IRS now?
Different taxing authorities such as the CDTFA, FTB, and IRS can share audit results amongst each other. This being said, if you aware a return you or your business filed was inaccurate, you should generally file an amended return correcting the inaccuracy.
My business received a large bill from the CDTFA and I cannot pay the bill off. What are my options?
If you receive a bill from the CDTFA and you or your business are unable to pay it off, payment options may be available. Payment amounts could be based on your business’ ability to pay and may require a financial statement. A few businesses may qualify for an Offer in Compromise which allows businesses to settle with the CDTFA for a fraction of the amount owed.
Will I go to prison for not paying sales tax?
Individuals who violate criminal tax statutes can face potential criminal penalties. Fortunately, most people with CDTFA tax issues are in no real danger of facing criminal charges. Nevertheless, if you have concerns about CDTFA related criminal charges, you should discuss those concerns with an attorney. Discussions you have with accountants and other non-attorney tax professionals are generally not privileged and can be used as evidence against you in a criminal proceeding.
I have a business that pays excise taxes and sales taxes. Will the CDTFA audit me for both types of taxes? CDTFA FAQ
It is fairly common for the CDTFA to audit a business for two or more tax types. For example, the CDTFA may audit a cannabis business for both sales taxes and cannabis excise taxes as part of the same audit. The CDTFA will issue a letter of assessment for each type of tax. The taxpayer may decide how it wishes to proceed with any appeals or settlements with each assessment. For example, a cannabis business may wish to accept the CDTFA’s sale tax assessment and appeal the CDTFA’s cannabis excise tax assessment.
Why is the CDTFA auditing my business? CDTFA FAQ
There are many reasons why the CDTFA selects a particular business for audit. Sometimes the selection is purely random. Sometimes the CDTFA may be aware of a “red flag” such as a business having credit card sales reported on 1099-K returns that are not consistent with the sales the business is reporting on its CDTFA returns.
My business does a lot of cash transactions. Will that be an issue with a CDTFA audit?
Businesses that accept cash are not breaking the laws. However, the CDTFA is always suspicious of businesses that have cash sales and almost always suspects these businesses are under-reporting cash sales. Businesses can better prepare themselves for CDTFA audits by tracking sales using POS systems and keeping meticulous and thorough records.