A recent case handed down from the California Office of Tax Appeals highlights the potential benefits of coming to a meaningful settlement with tax authorities at the audit level rather than waiting for the case to go to appeals. Sales tax audits can be brutal and the bar for redetermining a taxpayer’s sales tax is set incredibly low. If you have received notice that you will be audited for sales tax purposes, it is in your best interest to contact an experienced sales tax attorney today.
CDTFA Recomputed Taxpayer’s Taxable Sales, Taxpayer Unable to Rebut Auditor
In Brar, the taxpayer’s five retail locations were under audit by the California Department of Tax and Fee Administration (CDTFA) (Brar, California Office of Tax Appeals, No. 18012053). Auditors accepted the taxpayer’s sales tax calculations at the first three but recalculated his sales tax liability in the fourth and fifth locations. The fourth location’s taxable sales were adjusted to reflect mark-up audit methodology and the fifth location’s taxable sales were increased to reflect the disallowance of claimed non-taxable sales. The recomputation of taxable sales resulted in substantial additional sales tax due to the state.
In redetermining the taxable sales at the taxpayer’s businesses, the CDTFA auditor used records provided by the business, as well as records obtained by the CDTFA in the course of the audit, including sales records from vendors that provided goods and rebates to the taxpayer. Such third-party records often help the CDTFA build a case that taxable sales have gone under-reported.
Understanding the Sales Tax Audit Process
An agent-auditor from the CDTFA conducts sales tax audits. He or she is supposed to work impartially to determine the business’s compliance with their tax obligation. The auditor is supposed to determine whether under or overpayments of taxes and fees have been made by the business. Typically, the auditor accomplishes his task by referring to the records a business a business owner must keep and provide per Regulation 1698 Records. In general, the owner of a business must keep and maintain records of the following types:
- The company’s normal books and accounts. These are the type of records that the “average prudent businessperson engaged in the activity in question” would keep.
- Any other document “of original entry” that corroborates or supports the records kept in the ordinary course of business including:
- Receipts
- Bills
- Invoices
- Cash register tapes
- Schedules the business owner or his or her accountant used in the preparation of tax returns.
- Any other record that is necessary to determine the correct amount of sales or use tax liability for the business.
After reviewing the documentation listed above, the CDTFA auditor is tasked with deciding if any adjustments to the taxpayer’s sales tax computation are warranted. As a general matter, if the CDTFA recomputes a business’s sales tax calculation because either they had not performed a calculation or their tax and accounting systems were left wanting, the CDTFA must only show that its new calculation is rational and reasonable. This is a relatively low threshold to cross.
If a taxpayer appeals after the CDTFA has recomputed sales tax liability and shown that their method of such recomputation was reasonable, the burden shifts to the taxpayer to show that a more appropriate result using a different method of computation is warranted.
Key Takeaways
It is easy to see that once the CDTFA settles on a recalculation of the taxable sales, it is rather difficult to rebut the presumption that there is a better calculation method. This is especially true when the taxpayer has a lack of efficient tax and accounting systems to support their initial tax computation.
It is generally in a taxpayer’s best interest to settle any disputes with the CDTFA at the audit level. By the time that the audit is complete, and the taxpayer is assessed a deficiency, the likelihood that the outcome will change as a result of an OTA hearing are much lower. The key takeaway from this story is that if you receive a notice that your business will be the subject of a sales tax audit, it is in your best interest to seek the representation of an experienced sales tax attorney. Your tax lawyer will be with you throughout the entire process and ensure that any opportunity to mitigate additional tax or settle the matter without a substantial negative impact to the taxpayer is acted upon.
Contact an Experienced Tax Attorney Today
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience representing a diverse group of taxpayers of both in and out of state retailers. From individuals to middle market businesses and beyond, our team of zealous advocates will assist in the development of a strategy to help you reach your specific goals and objectives. Whether you are under a tax examination or are in need of tax planning advice, contact the Tax Law Offices of David W. Klasing today, online or by phone at (800) 681-1295, for a reduced-rate consultation.
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