California’s State Board of Equalization (BOE) imposes sales tax on gross receipts from retail sales and requires re-sellers and retailers to collect all sales taxes and then forward these collected taxes in a pre-determined and timely fashion to the State Board of Equalization. The BOE also conducts sales tax audits and collects unpaid sales and use taxes.
In California, the BOE has conducted more than 60,000 audits and collected hundreds of millions of dollars in taxes in recent years. With California’s need for immediate revenue, BOE sales tax audits have dramatically increased this year.
You are in for a potential world of pain if it was determined that you owe additional sales taxes after being audited by the BOE. The State Board of Equalization may hold individuals personally liable for the amount of sales tax owed, if a business (even a corporation) cannot pay the amount of sales tax assessed in a redetermination. Furthermore, there is no requirement that the person assessed is an officer of the company. Therefore, the BOE will often assess directors, officers, shareholders, and any other person who supervised the filing of sales tax returns or the paying of sales tax. This could even include a part-time bookkeeper or comptroller.
When the BOE conducts a sales tax audit they use a variety of different techniques depending on the type of business under audit. The State Board of Equalization of California often uses a “mark-up audit” when it suspects that the reported sales were understated. This is often employed when the taxpayer’s records cannot be verified by a direct audit approach.
The “mark-up” is the amount that is added to the cost to obtain the sales price. The BOE analyzes the purchases of the business to estimate what the sales should have been by using this “mark-up” methodology. The “mark-up” figure may be used to determine the sales of a business or even to verify a deduction. More often than not the resulting sales numbers are significantly different than the sales reported. This is because there are several weaknesses with this audit method. For example, the mark-up method assumes that the current mark-up figure was the same throughout the entire audit period. It blatantly ignores a prior existing pricing structure, to the detriment of the business owner.
Keep in mind, it does not matter if you actually are reporting all of your sales and dealing with other issues mentioned above properly. The BOE’s process is flawed and initial results more often than not are incorrect. However, at the end of the day it is the taxpayer’s responsibility to disprove the assessment. For this reason alone, it often is crucial for a business owner to retain a tax attorney to defend himself or herself against the State from over-reaching for tax liabilities.
In addition to the added sales taxes that might be determined to be due and payable, sales tax audits by the BOE often make claims as to unreported sales which may also lead to trouble with other taxing authorities because the BOE shares information with the Franchise Tax Board (FTB) and the IRS. An assertion by the BOE that significant sales were unreported could potentially trigger criminal tax liability exposure.
For more information on criminal tax exposure see:
Unreported sales are routinely reported to the FTB and possibly to the IRS criminal investigation division. Unreported sales of $100,000 or more in any one quarter are automatically referred to the FTB. The FTB may automatically adjust the return for unreported sales that were determined to have been unreported by the BOE in the best case scenario, or in the worst case scenario, cause the opening a criminal tax investigation by the FTB or a referral by the FTB to the IRS criminal investigation division. Furthermore, unreported sales can result in prosecution directly by the BOE for felony sales tax evasion.
Hiring an experienced sale tax attorney is essential because they know how to navigate the complex sales tax laws as well as the BOE’s audit procedures and tactics. In addition, a sale tax attorney will seek to ensure that the BOE does not overstep its bounds by interpreting complex sales tax law to your disadvantage, and prevent the BOE from making unfair assumptions about your business revenue. It is wrong for the BOE to overtax businesses simply because the California government needs the revenue.
Furthermore, the BOE seems to believe that all cash basis businesses routinely underreport cash sales and thus simultaneously commit sales tax evasion and income tax evasion, which could potentially land you in jail if allowed to be proven.
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