The BOE reviews the purchase invoices of my business

Yes, the Board of Equalization (BOE) may review a business’ purchase invoices. When the BOE conducts such a review, it is often looking to see whether the seller charged sales tax (or enough sales tax). There are some common scenarios the auditor will look for. We discuss a few of them in turn below.

  1. Improper Use of Resale Certificate

The auditor will sometimes discern whether a seller failed to charge sufficient sales tax because of the misuse of a Resale Certificate.

  1. General

Sometimes the BOE will discover that no sales tax was charged on some (or all) of the invoices. When it discovers this, the BOE will want to know whether the buyer issued a purchase order that was marked “for resale.” In other words, the BOE wants to discern whether the buyer issued a “Resale Certificate” to the seller. A sample Form (Form BOE-230) of this Resale Certificate can be found here: http://www.boe.ca.gov/pdf/boe230.pdf

The importance of the Resale Certificate arises from the following declaration that the buyer is required to make:

I will resell the item(s) listed in paragraph 5, which I am purchasing under this resale certificate in the form of tangible personal property in the regular course of my business operations, and I will do so prior to making any use of the item(s) other than demonstration and display while holding the item(s) for sale in the regular course of my business. I understand that if I use the item(s) purchased under this certificate in any manner other than as just described, I will owe use tax based on each item’s purchase price or as otherwise provided by law.

Why is this declaration on the Resale Certificate significant? It is significant because it allows the purchaser to avoid paying sales tax to the seller. If the purchaser is holding the items for resale, he may avoid taxation on the purchased items because he would be entitled to an offsetting deduction of the sales tax otherwise due. This is discussed in more detail on this website.

  1.                   Liability for Intentional Misuse of Resale Certificate

Caution must be used in filling out a Resale Certificate. In some cases it can be deemed fraudulent to utilize a resale certificate. If someone gives one of these certificates to buy property (in order to avoid sales/use tax), but he knows at the time of purchase that the purchased items will not be resold in the ordinary course of business, then he could be liable for: (i) the amount of tax that would be due had the certificate not been used; (ii) any interest payments on the tax; (iii) he could have his seller’s permit cancelled; (iv) be forced to pay a 10% penalty on the amount of tax due (or $500, whichever is greater) on each purchased item; and (v) a 25% penalty for fraud may apply. Finally, fraudulent use of Resale Certificate may result in a (vi) misdemeanor, punishable by $1,000 – $5,000, or a 1-year prison sentence (or both). See http://www.boe.ca.gov/sutax/faqresale.htm

  1. Improper Computation of Sales Tax because of Bad Faith.

There are circumstances where the auditor will prepare Form BOE-1164, including where the auditor finds that the Resale Certificate was issued in bad faith. One audit technique is to compare the listed items sold with the nature of the purchaser’s business. If the goods purchased are not the sorts of things that are regularly sold in the purchaser’s ordinary course of business dealings, the auditor will apply a higher level of scrutiny to the transaction, and question whether the use of the Resale Certificate was proper. For example, a jewelry store that sells diamonds, gold necklaces, and the like in the ordinary course of its business does not ordinarily sell janitorial equipment. Thus, if the jewelry store were to issue a Resale Certificate for janitorial items, the auditor’s increased scrutiny will be triggered. That scrutiny results in the auditor filling out Form BOE-1164, which could form the basis of an investigation.

  1. Improperly Computing Tax on Invoices

The auditor will be prepare Form BOE 1164 whenever it is suspected the seller improperly computes the tax on his invoices. The auditor will examine whether (1) the seller properly charged (the amount of) sales tax; (2) he charged tax on any repair labor or other exempt items; or (3) he failed to charge tax on fabrication labor, trade-ins, or similar items as these—for these items are required to be included in sales price, and thus subject to sales tax.