Nexus is a legal term and what it means is essentially a code for the level of minimum contacts that you have in a state. Minimum contacts can include:
Do I have a state income tax filing requirement in that state? The answer to this question is probably. By purposely availing yourself to a state, by registering yourself for a seller’s permit and/or registering as a foreign entity and qualifying to do business in a state, more than likely you’re going to subject yourself to state income tax jurisdiction. Now does that mean if you’re registered for seller’s permits in thirty five or forty states that you should just go around and file 35 or 40 state income tax returns? No, the idea with compliance is understanding what your exposure is in different states and then registering or filing returns appropriately in order to meet the needs of your business. So there’s a balance between putting yourself in compliance and then making sure you’re doing the right thing for your business. So the important thing to do is sit down, look at the operations of your company, look at where you’re making sales and craft a multi-state tax strategy and a filing strategy that’s appropriate to that. When we’ve done this for different businesses that we’ve worked with and when we deal with clients on the subject, a lot of times the liability that they have, the filing requirements that they have and what they end up doing is a lot less in scope than they initially thought so it’s important to have a plan in place. It’s important to know that registering in one jurisdiction for a sales tax perspective is probably going to create a filing requirement in that jurisdiction and require managing and mitigating that situation appropriately.
CDTFA audits can result in significant assessments — especially if records are incomplete. The direction of the audit is largely set by how you respond to the initial document request. If you’re at any stage of a sales tax audit, a brief review can clarify what you’re facing.
Discuss My Sales Tax Audit → Or call: (619) 378-3138
So the auditor comes back, you’ve gone through the audit process and there’s a report. If you agree with the report and you agree with the liability, then you’re done so you sign off on the report. Whatever you owe you either pay it or it goes to collections. If you don’t agree with the report, then you have some options. Option number one is you can continue to go back and forth with the auditor, get the auditor’s manager involved or get the head of the audit unit for the local office involved depending on how high you want to take that. Depending on the facts of the case, depending on who the auditor is, the personalities, you may or may not want to do that. If you ultimately get to the point where you decide to stop working with the audit unit, then you will file an appeal. In order to issue you an assessment, you’ll file an appeal and you’ll go through the EDD appeals process. So EDD appeals are handled by an organization called CUIAB that stands for the California Unemployment Insurance Appeals Board. So you can go through the formulaic appeals process, in which case you’ll get your “day in court” or you can go through the EDD settlement department and try and settle your liability out. Depending on the facts, depending on the circumstances, depending on the people involved, there are a variety of different avenues and you know we found success kind of at a bunch of different levels so it’s difficult to say without any knowledge of your actual situation what’s the best route to go. But generally speaking that’s kind of what you’re looking at and those are three flavors for if you ultimately get your result and you don’t like it.
If you’re dealing with an IRS audit, collection action, California state tax matter, or any other tax issue, we can review your situation in a free 15-minute consultation.
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Companies are selected for sales tax audits in a variety of different ways but the one thing I want to highlight is that the state has very limited resources in terms of which companies it chooses to audit. Sales tax audits in particular are tremendously resource consuming activities, so the state has to be very careful about which companies it selects for audit and which it doesn’t. So for example the way
Companies are selected for sales tax audits in a variety of different ways but the one thing I want to highlight is that the state has very limited resources in terms of which companies it chooses to audit. Sales tax audits in particular are tremendously resource consuming activities, so the state has to be very careful about which companies it selects for audit and which it doesn’t. So for example the way
These audits are very complex and the reason that they’re complex is they involve a very large degree of data. So for example, when you’re dealing with an income tax audit you can go through a company’s bank deposits and determine pretty quickly how much income they had or didn’t have. With a sales tax audit you’re dealing with taxable sales so if you picture a restaurant, for example. Say your average restaurant does a hundred transactions in a day over
CDTFA auditors are looking for mistakes. They’re looking at your data, they’re looking at how that data relates to each other, they’re looking at the returns that were filed and they’re looking for any errors that exist. The most common errors are discrepancies between primary source data and the sales tax returns that were filed. So for example, the sales on your federal income tax returns don’t match the sales that were filed on the sales tax returns. The auditor will find that error and figure out a way to calculate what the true percentage of sales were or at least true from the auditor’s perspective.
The biggest mistake that I see taxpayers make and the biggest area of risk that they have is the dangerous assumption made by taxpayers that because they “didn’t do anything wrong” in the sales tax audit, they don’t have anything to fear. The reality of the situation is that the auditors are looking for mistakes in the way that the taxpayers filed their sales tax returns and in the amount that they paid. The auditors are devoting a significant amount of time and energy to going through all the taxpayer’s data and verifying their taxable sales so the reality of the situation is is that even if you don’t feel like you made a mistake,
What type of documentation will I need in my sales tax audit? So if you’ve gotten an audit notice and you’ve read the auditor’s document request, you’ll have a pretty good idea of what they’re requesting. The auditor is looking at two things. They’re looking at sales that you made, obviously, it’s a sales tax audit, and they’re looking at purchases to make sure that sales tax was properly paid and charged on those invoices. That could affect either you or to be looking at your 1099Ks in certain cases with certain industries.
So those are what I call the big five. That’s the data that the auditor wants to see first because they want to make sure that all the big five data matches itself. The next thing they’re going to ask you for is they’re going to ask you for copies of your sales invoices and your purchase invoices for the audit period.
Now for a lot of people, including companies that do a lot of actions, producing all the sales and purchase invoices, is quite a tall task. So one of the big things that you’re going to want to do is agree with the auditor on perhaps taking a sample for sales and purchases so you don’t have to dig out and organize three years of records. This is a huge time saver.
And lastly, the auditor is going to ask for special items. These can include resale certificates. These can include exemptions. These can include other evidence that they might want to see, like the sales tax accrual account or any supplemental information. And so the key is, is in sitting down with the auditor and developing an audit plan, you can often streamline this document request down to something that’s much more manageable.
Again, the more information you give the auditor, the more avenues of attack that you expose yourself to. So you want to make sure that you control things and that you’re presenting things in a clean and consistent manner. That’s the best way to get through the document part of a sales tax audit.
CDTFA audits can result in significant assessments — especially if records are incomplete. The direction of the audit is largely set by how you respond to the initial document request. If you’re at any stage of a sales tax audit, a brief review can clarify what you’re facing.
Discuss My Sales Tax Audit → Or call: (619) 378-3138
Yes you can. If the CDTFA thinks you’re willfully under reporting sales tax and/or fraudulently filing returns, you can and will receive a criminal referral. One of the biggest jobs that we have at the beginning of an audit when somebody comes to me and says I’ve underreported on my sales tax and now I’m getting caught is to mitigate any evidence that there is any willful conduct on behalf of the client. The goal with any potential criminal matter is to keep it civil and to minimize the damage as much as possible. So you can trigger a CDTFA fraud referral based off of that but also even if you’re not going to go to jail for the errors that you caused on the sales tax returns, you have to be mindful of penalties. CDTFA has a very rigid penalty scheme particularly with respect to fraud penalties and sales tax that was collected but never paid over to the state. So in addition to worrying about going to jail, you need to be worried about the escalating liability, because an escalating liability once it gets into collections can create a huge problem for the taxpayer. While you’re in the examination phase of a CDTFA audit, you want to make sure you can make the biggest adjustments possible and eliminate any notion that there was any willfulness behind your actions.
CDTFA audits can result in significant assessments — especially if records are incomplete. The direction of the audit is largely set by how you respond to the initial document request. If you’re at any stage of a sales tax audit, a brief review can clarify what you’re facing.
Discuss My Sales Tax Audit → Or call: (619) 378-3138