March 2008 Archives

California State Board of Equalization (BOE) Loses Sales Tax Case

March 21, 2008,

The California State Board of Equalization (BOE or SBE) was handed a defeat by the California Appellate Court in Dell Inc. v. Superior Court of San Francisco 159 Cal.App.4th 911 (2008) . The court held that the value of the Dell service contracts purchased by consumers was not subject to California Sales Tax even though the price of the contract was not separately stated in the invoice. The case has potentially wide reaching application to other California sales tax audits.

The facts in Dell indicated that the service contracts were optional, and that they were priced separately from the underlying computer equipment. For example, a consumer purchasing a computer could check a box on Dell’s website to add a service contract for an additional $x. The amount would be added to the purchase price but the invoice issued to the customer would indicate a lump sum price for the computer and the service contract. Everyone agreed that if sold separately the service contracts were intangible property, not subject to California sales tax. It was also agreed that if the Dell service contracts were sold with computers they would not be subject to California sales tax provided that the price of the sales contract is separately stated in the invoice or other contract of sale.

The BOE argued, however, that in the absence of a separate statement of the charge for the service contracts they are subject to California sales tax. The Court disagreed, and found that the transaction was a “mixed transaction” involving separately identifiable transfers of goods and services. It differentiated the sale from a “bundled transaction” involving goods and services that are inextricably intertwined in a single sale. As such as long as the value of the separable identified parts can be established then the value attributable to the transfer of intangible property or services is not subject to California sales tax.

If you have California sales tax problems contact Los Angeles, California State Bar Certified Tax Specialist Dennis Brager.

Tax Return Preparer Penalty Procedures Announced by Internal Revenue Service (IRS)

March 7, 2008,

The Internal Revenue Service (IRS) has issued a memorandum outlining its procedures for investigating tax preparers who show patterns of abuse, and thus may be subject to tax preparer penalties. The memo sets forth some interesting information. At least in cases initiated through LMSB (Large and Midsize Business) Division the approval of the IRS Director of Field Operations is necessary. Once an investigation has been approved the IRS may select up to 30 tax returns prepared by the preparer, and a tax audit of those returns will be opened. Of course this means that the tax return preparer’s clients will be contacted, and once the preparer’s client’s realize that they are being subjected to a tax audit solely because of who prepared their tax return it is likely they will find a new tax preparer in short order. They may also tell their friends, who are also clients, about their tax audit. In short a preparer investigation can quickly devastate a thriving practice even if the tax preparer is ultimately determined to have acted properly. For this reason it is critical that any hint of an IRS investigation must be responded to quickly, with the hope of rapidly putting it to an end.

If you are a tax preparer, and believe you may have been targeted by the IRS for a tax preparer penalty investigation contact California State Bar Certified Tax Specialist Dennis Brager.