NATIONALLY RECOGNIZED FEDERAL LAWYERS
Last Updated on: 3rd August 2023, 09:12 pm
California has one of the highest sales taxes in the United States. The state’s sales taxes were once collected through the Board of Equalization, but things have changed as of 2017. Instead of being the responsibility of the BOE, a new agency called the California Department of Tax and Fee Administration was created.
Sales taxes are given to retailers who sell tangible assets in a retail store. The purpose is for retailers to pay for the ability to do business in California. Taxes for a business are measured by looking at their gross sales receipts. In addition, the CDTFA is responsible for the California Use Tax.
Several thousand people are part of the CDTFA. Before that, the majority of them worked for the BOE. They have extensive experience with ensuring compliance with California tax laws. The BOE still exists and is run by a board of five members, four of whom are elected to represent one of the districts in the state. The fifth member is the state controller. But they don’t listen to tax appeals anymore, instead deferring appeals to the official Office of Tax Appeals.
California’s tax bureaucracy is complicated, and it can be overwhelming for the average person to navigate.
Sales tax audits are initiated by the CDTFA. How the audit is done will depend on what kind of business is being audited. One example would be auditing a bar by finding out how much alcohol is in a drink, examining the company’s purchase records, and determining how much money the company made from sales through this.
Regardless of the industry, an audit will involve a basic preliminary exam. The auditor will compare the official numbers recorded in the business’s tax paperwork with the numbers in the books. They will also look for discrepancies in the business owner’s income taxes and the reported sales taxes. There are some other aspects of the business income that they might check for discrepancies, such as the resale information filed with the agency versus the number of sales the business reports in their personal logs.
The auditor will request a variety of different records to go over all of this information.
They will ask to look at the accounting books for the business. That includes ledgers, balance sheets, financial plans, records of operation, federal tax returns, state tax returns, and income statements for both the business and business owner.
They will also ask to see documentation that verifies the information written in the books. For example, they might ask for purchase and sales invoices, contracts, supply orders, bank statements, vendor communication, rent payments, and other documentation that attests to the costs of operation and overall income.
If the business had sales that were exempt from sales taxes, they will need to provide documentation like bills of landing, exemption certificates, and resale certificates to prove the transaction was legitimate.
In addition to being asked to provide copies of your California sales tax return, you will need to give the auditor the schedules and papers used to calculate the return. Your business’s accountant should have all of this information on file.
A lot of the issues with sales taxes arise because businesses don’t keep good enough records. If you’re concerned that you might be liable for sales tax issues, you can reach out to an attorney. They will examine your records to determine whether they’re sufficient enough to stand up to an audit. If they aren’t, then the attorney can advise your CPA about what to do to keep better records in the future.
There are serious potential consequences to being found guilty of sales tax understatement. The CDTFA might take this as evidence that the business or the business owner also underpaid on their federal and state income taxes. The IRS and the state tax board in California will both be apprised of any judgments made. This can lead to new audits being started for other aspects of the business.
Because of this, it’s recommended that business owners file a dispute when their sales tax judgment is in error. You might think that it will cost less to simply pay the back taxes and move on, but that’s not true. Doing so will open you to further costly action from both the federal and state level. It’s much better to hire an attorney who can represent your interests and explain why the judgment was in error.
There are a variety of ways for an attorney to solve a tax issue after an audit. At the end of every audit, there will be an exit conference held by the auditor. The supervisor of the auditor might be in attendance. This conference is the place where the auditor will pass on their proposed taxes. Your attorney can meet with the people responsible for the audit to get your tax bill reduced.
In cases where the business owner and CDTFA can’t come to an agreement about the audit, a Notice of Determination will be filed. Your attorney can petition within 30 days of the notice being sent out. After filing a petition, you might be able to settle your case.