Sales tax in the State of California is a big business. In 2016 alone, sales tax in California generated nearly $52 billion dollars in revenue for the state. With that kind of money, you can rest assured that California keeps a close eye on the sales tax revenue stream.
Sales Tax Administration and Responsibility
Sales taxes in California are administered by the State Board of Equalization (BOE). The BOE not only collects sales and use taxes, it also enforces the state’s tax regulations and conducts audits to ensure full compliance. In general, all sales by retailers within the state are presumed to be taxable unless they are exempt under the tax code. This tax is imposed on the retailer for the privilege of selling tangible personal property at retail. In addition, all purchases of ex-tax tangible personal property (usually purchased out of state) that is brought into California for use here, is taxable. This is often referred to as the complimentary use tax, imposed upon the storage, use or consumption in this state of tangible personal property purchased from a retailer. This use tax is imposed on the consumer. If a taxpayer is claiming an exemption, that exemption must be proven and documented. The burden of proving and documenting a specific exemption falls on the taxpayer who is claiming that exemption.
As mentioned, all California retailers are required to pay sales tax on their gross receipts from sales of tangible personal property in the state. This tax can be considered a fee levied by the government in exchange for the right to sell goods to the general public. As of January 1, 2017, the state and local sales tax rates vary widely among taxing jurisdictions. The lowest rate is 7.25% and the highest is 9.75%. This sales tax is usually passed on to the buyer of the goods as a part of the purchase price. The amount of sales tax that any retail business owes to the state is generally calculated by the amount of gross receipts from total retail sales that the business collected in a given tax period. The BOE assigns a filing frequency (quarterly, monthly or annually) based on a business’ previously reported sales tax or on its anticipated taxable sales at the time the business registers with the state. It is a retailer’s responsibility to report its gross retail sales and taxable sales to the state BOE and pay the applicable sales tax. Most retailers file quarterly sales and use tax returns but pay their sales tax monthly (either 90% of the tax due for that month or equal to one‐third (1/3) of the measure of tax liability reported for the corresponding quarterly period of the preceding year multiplied by the tax rate in effect when prepayment is made, based on their previous year’s sales.) Now, how’s that for being complicated?
Common Sales Tax Problems
All taxes, whether imposed at the state or federal level, are prone to cause problems, i.e., in understanding the law, reporting, computing taxes, compliance with the law and regulations, etc. California sales and use taxes are no exception. An individual retailer may not understand the full extent of its sales and use tax responsibilities. This results in misreporting, underpayment or both. Alternatively, a retailer may have deliberately taken steps to hide its revenues in an effort to mitigate its sales tax burden. In either event, the result is a sales and use tax problem that will eventually be noticed by the BOE and result in certain enforcement actions.
In this section, we’re going to look at some of the most common problems that retailers face when it comes to sales tax. If one of these problems applies to your business or if you have been contacted by the BOE in regard to an audit or an irregularity in your reporting or payment, you need to seriously think about hiring an experienced California sales tax attorney. The BOE aggressively pursues sales tax reporting irregularities and audit issues. The penalties involved for underpayment can be severe. A competent sales tax attorney can save you time, money, and even your business.
Failure to File or Pay on Time
When you registered your business with the BOE, and obtained your Seller’s Permit, you were no doubt assigned a sales tax return filing frequency. As mentioned above, this frequency could have been quarterly, monthly, or annually. This means that your Sales and Use Tax Return to the BOE is due when your assigned reporting period ends. So, for example, if your reporting period is quarterly and this quarter ends on March 31, your return and final sales tax payment for the quarter are due on the last day of the following month, in this case, April 30th. It is your responsibility to meet these assigned deadlines and make the required sales and use tax payment. Failure to do so will result in the imposition of penalties and fees. If you’re having a problem with your sales and use taxes, the worst thing you can do is ignore the problem. This will only make matters worse. Installment payment plans are available. If you qualify for an installment payment plan, you will not only begin to reduce your tax liability, you may also be able to reduce or eliminate any penalties or fees that have been imposed as a result of failing to file or pay on time.
Keeping Poor Records
It is your responsibility as a business owner to keep and produce all records and supporting documentation that supports your sales and use tax return. In fact, the BOE requires all businesses to retain the following documents and records if applicable to your type of business:
- Purchase orders
- Delivery receipts
- Freight invoices
- Bills of lading
- Resale certificates and
- Relevant correspondence
- Sales invoices
- Sales journals
- Cash register tapes
- Purchase invoices
- Certificates of tax exemption
- All documents used in preparing your tax return
Remember, it is also your responsibility to keep track of your sales through a comparison of your recorded and reported sales. These two numbers should match. If they don’t, it is your responsibility to explain, justify and resolve the discrepancy with the BOE.
Receiving a notice of audit from the BOE is never a pleasant experience. However, it is far from the end of the world. An experienced California sales tax attorney will be able to guide you through the process helping you to minimize the taxes, interest and penalties due.
In general, your notice of audit will also include a list of documents that the BOE is requiring you to prepare prior to the audit. Typically, the required documents include your account books, any documentation that supports those books or your tax returns and any certificates for tax exemptions that you have claimed.
Once the audit has been completed, you have the right to challenge the outcome. Your challenge can be resolved through an agreement with the auditor handling your case, that auditor’s supervisor or the BOE principal auditor for the tax district your business is located in. If you cannot come to an agreement with any of the BOE’s representatives, you will receive a Notice of Determination from the BOE. It then becomes your responsibility to satisfy or fight that determination.
It should be noted that the BOE takes the audit process very seriously. You should do likewise. The Taxpayers’ Rights Advocate Office is available to assist you in determining who to contact at any point in the audit process, as well as to help with filing the required documentation. However, the best practice in any BOE sales tax audit situation is to contact a California sales tax attorney who is experienced in California sales tax law. He or she can protect your interests by handling the audit, appeal, hearing, settlement or offer in compromise negotiations, and/or arranging an installment payment plan that you can live with.