California board of equalization (BOE) is now California Department of Tax and Fee Administration (CDTFA)
As the famous saying goes ‘In life, nothing is certain, other than death and taxes‘. Try to cheat the taxman, and there will only be one winner, and unfortunately that winner will never be you. We all have to pay our taxes, and as you probably know, with different rules, laws, and regulations in different states, getting your head around the sales and use taxation system, can prove very tricky. As you know, there are many different forms of tax out there, yet today we are going to be focussing our attention on sales and use tax, specifically California sales tax problems and audits. Sales tax in California can be tricky to wrap your head around at first, but things will become easier as time goes by. Alternatively, you could always choose to hire tax professionals (tax lawyers, CPAs, Enrolled Agents) who will not only help ensure your taxes are in order, but they will also be able to offer you professional help and advice along the way. But, we digress, so back to the topic at hand, as we will now delve deep into the world of California sales tax and how to deal with audits by the California Department of Tax and Fee Administration (CDTFA).
What is sales tax – First and foremost, before we proceed any further, we should begin by looking at exactly what a sales tax is. As mentioned, it is fairly complex but we’ll do our best to keep things as simple and as easy to understand for you as we possibly can. Basically, sales tax is a unique form of consumption tax which the government will impose, based upon the sales of goods and services. You will find that conventional sales taxes are levied directly at the point of sale, where they are then collected by a retailer, before finally being handed over to the government. You will find that businesses are liable for sales taxes, if there happens to be a nexus there, which may be an employee, a bricks and mortar physical store, an affiliate, or even another presence, which will of course depend upon the laws within its particular jurisdiction. Again, it is always advisable to consult tax professionals (tax lawyers, CPAs, Enrolled Agents) to help clear up any discrepancies.
Common California tax problems – Now that we’ve looked at sales tax, we’ll now take a look at some of the more common tax problems, in the state of California. The majority of the issues we’re about to list could be resolved by fixing the tax base, rather than focussing on rate increases. Rate increases would generally make the issues worse. Common problems include:
Uncollected taxes – To begin with, uncollected taxes is actually a very big problem, far larger than a lot of people seem to realize. Each year, in California alone, more than $1 Billion of use taxes owed to the state of California, goes uncollected. One of the main reasons for this is that a lot of people eligible for these tax payments do not know what use tax is, and if they don’t know what it is, paying it becomes much, much harder.
Large taxation rates – Another very common problem is high tax rates. Sales tax rates stand at 8.25%. This is the largest in all of the US. What’s more local districts can actually impose higher rates still.
Missing fairness and equity – The third issue we’ll be looking at is that equity and fairness is often missing. You see, sales tax will only apply directly to tangible goods. Because of this, some consumption items including digital services and goods, are tax-free. As an example, if a consumer was to purchase a CD, they would pay taxes on it, yet if they downloaded a song online, they wouldn’t. Hardly seems fair, does it?
California sales tax Audits – In California, sales taxes are collected by California Department of Tax and Fee Administration (CDTFA) formerly the SBE, or the State Board of Equalization (BOE). There are thousands of individuals employed by the CDTFA, who will perform sales tax audits, as well as collecting unpaid use taxes and sales taxes in the state of California. If a business happens to be audited, the CDTFA will actually employ a wide variety of different strategies and techniques, based upon the business being audited in general. As an example, when bar owners are audited, an auditor may go undercover and carry out what is known as a ‘pour test’ where the aim is to identify how much alcohol is being used in each beverage. From here, they will then examine the bar owner’s purchase records and can offset this info against the sales prices to determine the exact amount they have made in sales. In simple terms, the auditor will compare the taxpayer’s books with the taxpayer’s tax returns, looking at the total sales recorded on each, to make sure the numbers add up correctly. If you find yourself being audited, the CDTFA will require the following records:
Accounting books – These books should include income statements, general legers, balance sheets, as well as other records summarizing operations of the business in question, including income tax returns.
Tax return copies – The CDTFA will also require copies of tax returns, as well as schedules, and other documents used to prepare and compile said tax returns.
Supportive documents – Supportive documents will also be required by the CDTFA to back up info entered in the books of the taxpayer. For example, bank statements, receipts, invoices, and contracts, may be required to basically help prove that the info entered is accurate to the best of the taxpayer’s knowledge.
Claimed exempt sales documents – Finally, the CDTFA may also require exemption certificates, bills of lading, resale certificates, and any other documents which may happen to support claimed exempt sales.
Remember, the most common problems associated with California sales tax arise as a result of the taxpayer failing to remit the taxes collected or keep adequate books and records. Therefore, it is always advisable to consult tax professionals, tax lawyers, CPAs, Enrolled Agents, are best experts and basically let them handle all of the metaphorical heavy lifting for you. Not only can they help you get your records and taxes in order, represent you for unpaid sales tax or if audited, they can also advise you on how to make the process easier in the future.
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