strategies-init

So we’ve done a lot of sales tax audits on our firm and I can speak very generally about some of the problems that we see most often that our clients encounter or that we’ve encountered through the course of dealings. So problem number one is the majority of people who are under reporting on sales tax for whatever reason or another don’t do enough to cover their bases. While that seems fairly silly, it’s really true. The biggest way that people get nailed for sales tax audits is by data that doesn’t match. So what happens is when you file a sales tax return that gets reported to CDTFA and then in the evaluation process to determine whether they’re going to audit you, CDTFA is looking not only at your taxable sales and your total sales due looking at your federal income tax returns, but they’re looking at the information that was reported on your 1099 Ks and any other publicly available information that they could find. So the biggest problem that people have right off the bat is sales tax returns and federal income tax returns not matching. You’re reporting a lower or higher amount of sales than you are on your federal

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So statistics, just to give you a brief lesson, are about the integrity of the data that you have. So what you’re doing with statistics is you’re taking a representative population or an entire data set, let’s call it a business’s sales over a three-year period, and then you’re taking a representative sample, you’re trying to create a fair and accurate sample of that population. So if we were to look at the business of sales over a three-year period, the goal would be how do we take a smaller subset of that that we feel is going to be fair and accurate? So here’s where CDTFA audits often get into it as we have what we call a data file. So CDTFA and your sales tax auditors have very limited resources. When they do an observation test, when they do a mark of test and when they’re using the indirect methods of testing, they’re only going to do it for a certain period of time usually two to three days max. And so obviously the challenge is if you’re going to take a three day sample or a two day sample, how can that possibly be representative of over a thousand days over the course of a three-year period. Three days, a thousand days, it’s not very representative because you can have a variety of things that would go into those three days that could heavily tip the scales in one way or the other. Hopefully in the favor of your taxpayer anyway.

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So aside from discrepancies between the client’s reported taxable sales and the taxes due, with CDTFA’s calculation the the biggest problems that we see are in little technical areas. So the first one is sales for resale in California. When you sell a product for resale and obtain a valid resale certificate, that product is not taxable to you so the important thing here is number one, the product is being sold for resale. So it’s moving down the supply chain because from the state’s perspective, the state doesn’t want to tax it in the middle of the supply chain, it wants to tax it at the end of the supply chain. So if you’re manufacturing baseball bats and somebody is buying them to resell them to consumers, the state wants to tax it when it’s sold to the consumer at a higher market price versus when it’s sold to the retailer. So with sales for resale, the actual resale itself is an exempt sale but it’s only made exempt by the attainment of a resale certificate. For that particular transaction, the problem that we see with clients and one of the biggest discrepancies

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