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Sales Tax Issues & State Board of Equalization
Sales tax is administered and collected by the California State Board of Equalization. To ensure compliance, The State Board of Equalization conducts field audits regularly for a variety of businesses including manufacturers, construction contractors, vehicle dealerships, bars, restaurants, distributors, and many others. Sales tax audits are usually conducted on the premises of a business and are measured principally by looking at gross receipts from business sales subject to sales tax. In addition, sales tax auditors use other techniques to determine the amount of sales tax owed, some which are specific to a specific industry and others that compare the amount of sales on the taxpayers books to the amount of sales tax indicated on a business’s income tax return. Sales tax audits are often extremely time consuming because of the volume of records requested and the thoroughness of the examination. Auditors may examine any number of the following:
- Cash receipts
- Disbursement records
- Purchase journal, invoices, and orders
- Accounts receivable
- General ledger
- Register tapes
- Inventory
- Balance sheets
- Bank statements
- Resale certificates
- Exemption certificates
- Any other documents or summary records of business operations or which substantiate the taxpayers sales tax payments
In addition, if a corporation cannot pay the amount of sales tax that it is assessed in a redetermination, the State Board of Equalization may hold individuals personally liable for the amount of tax owed. Often the Board will assess officers, directors, shareholders, and any other person who supervised the filing of sales tax return or the paying of sales tax. There is no requirement that the person assessed is a shareholder or officer of the company, and therefore CFOs and comptrollers may be held liable for sales tax owed.
Sales tax audits can be particularly costly to taxpayers, especially those that do not maintain adequate books and records. In addition to the additional tax due, sales tax redeterminations may also lead to information sharing with the IRS and the Franchise Tax Board. This could potentially trigger other audits or lead to a presumption that income has been understated. In addition, the State Board of Equalization can revoke your seller’s permit, which will shut down your business operations since it a crime to continue to sell goods without a permit. If you continue making sales, you may be charged with a misdemeanor. However, taxpayers can appeal the auditor’s determination and also can ultimately sue for a refund in California Superior Court. You also have an opportunity to contest any misdemeanor charges filed against you.
If the State Board of Equalization has contacted you, we strongly recommend that you hire an experienced tax attorney to handle your audit. Hiring an attorney early in the process will also ensure fair treatment during the audit and will give you an advantage if you must file an appeal. Sales tax audits require a through understanding of State Board of Equalization procedure, California sales tax laws, and general knowledge of accounting principles and methods of proof that sales tax auditors use. If an appeal is unsuccessful, you will also need an attorney to represent you in California Superior Court in order to sue for a refund.
Please call our office if you are involved in a sales tax audit or if you have been contacted
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