Articles Posted in California Sales Tax Problems

Most, if not all, Payroll Protection Program (PPP) borrowers are focused on the question of whether they will be able to have their PPP loan forgiven.  Many questions have arisen, and some but not all, have been answered by the Loan Forgiveness Application and instructions   released by the SBA on Friday, May 15, 2020.  Here are some of the highlights.

  • Annual “cash” payroll costs are capped at $100,000 per employee. While this is not news, the SBA calculates that this amount on a pro-rata basis for the 8 week “Covered Period” is $15,385. If you do the math, that is equal to 8 weeks per year divided by 52 weeks multiplied by $100,000. Some were hoping that those on a semi-monthly pay schedule could use a larger amount based upon 24 pay periods per year. Apparently not.
  • Alternative Payroll Covered Period. The Covered Period is generally eight weeks (actually 56 days) beginning on the date the loan is first funded. The Alternative Payroll Covered Period is only for employers with bi-weekly or more frequent payroll schedules. Therefore, it doesn’t appear to apply to employers who pay semi-monthly. It begins on the on the first day of the first payroll period following the PPP Loan Disbursement Date and ends 56 days later.  The following example is provided:  Alternative Payroll Covered Period: “… if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the  Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.”  This suggests that one cannot include payments for a payroll period that begins before the PPP Loan Disbursement Date but is paid after that date. However, that is inconsistent with the Press Release issued concurrently by the SBA which states that the form and instructions provide “Flexibility to include eligible payroll and non-payroll expenses paid OR incurred during the eight-week period after receiving their PPP loan.” (emphasis supplied).  See more below.

How to Pursue Settlement with the Board of Equalization
If the Board of Equalization (BOE) conducts a sales and use tax audit on your business, you may face a sales tax liability of tens of thousands of dollars or more. To make matters worse, the BOE can share information with the California Franchise Tax Board and the IRS, resulting in more tax assessments, penalties, and interest due to delinquent state and federal income tax debt.

Settlements with BOE Tax Auditors

You (along with your tax attorney) can first attempt to settle your outstanding sales tax debt with the BOE auditor and/or his supervisor. This can occur during an exit conference following an audit. If you are unable to reach a satisfactory settlement, you can ask to meet with the BOE Principal District Auditor to discuss your case.

What Will an Auditor Look for in a California Sales Tax Audit?
A California sales tax audit  is conducted by the California State Board of Equalization (BOE). The objective of the audit is to determine if you have paid the correct amount of sales taxes.

The main question the auditor is attempting to answer is: Did you report all gross receipts from sales of taxable personable property? Businesses that have cash transactions are often targeted for sales tax audits. You are required to provide records during the audit process.

How an Auditor Looks for Sales Tax Problems

A sales and use tax audit in California is initiated by the State Board of Equalization (SBE or BOE), and its purpose is to determine whether a business has properly collected sales and use taxes. It will examine if the business has accurately reported gross sales receipts, deductions and business purchases. A sales tax audit will also establish if the business is applying the correct rate of tax on sales of tangible property.

A California tax lawyer will be able to advise you on the types of records you will need to provide at a sales and use tax audit, since the documentation required will vary according to the type of business that is being audited. The records will generally include income statements, tax returns (state and federal), sales tax returns filed with BOE, customer and vendor invoices and resale certificates. Our tax law team can advise you based on your type of business and the nature of the audit exactly what records you will need to produce.

In a sales and use tax audit, your records will be reviewed going back as far as three years, in some cases even longer. One of the factors that can prompt an audit, in fact, is a significant change in figures from one year to the next, so multiple years will be involved in a sales and use tax audit.

The California State Board of Equalization (BOE or SBE) announced almost one year ago that medical marijuana dispensaries are not exempt from collecting and paying tax attorneys are fielding inquiries from a number of medical marijuana dispensaries who are undergoing sales tax audits by the BOE. The M.O. of the BOE seems to be to stand at a discrete location outside of the clinic, and count the number of people coming in the door per hour. The Board then compares that to the clinic’s records of the number of patients, and if there is any discrepancy it calculates the value of an average “sale,” multiplies that by the number of alleged unrecorded patients per day, and projects that amount over a (generally) three year audit period.

Of course this projection by the SBE is rarely accurate, and fails to take into account a number of reasons that the dispensary’s records don’t match. For example, discrepancies can exist because:

1. Not everyone who comes into the clinic is a member, or actually fills his prescription 2. The number of patients entering the clinic on the particular day that the BOE is counting may be higher than average because the clinic was having a good day 3. The BOE may be using an inaccurate sale price which results in an overstatement of receipts.

There are many other reasons why the BOE estimates can be inaccurate. Luckily there are many avenues for appeal of a BOE determination. However, an ounce of prevention is worth a pound of cure, and proper tax representation during the initial sales tax audit may prevent problems from arising. Information on sales tax audits and sales tax appeals in general is available on our website, click here to view. Managers of medical marijuana cooperatives and collectives should also be aware that if the BOE determines that sales tax is due and the dispensary fails to pay they could be personally liable pursuant to California Revenue and Taxation Code Section 6829.
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The California State Board of Equalization (BOE or SBE) has scheduled a public hearing on an amendment to Regulation 1668, Sales for Resale. According to the BOE the purpose of the amendment is clarify the acceptable language in purchase orders taken by a seller in support of a valid resale certificate.

One method of overcoming the presumption in California sales tax law that any sale of tangible personal property is subject “at retail” and therefore subject to sales tax is to obtain a valid resale certificate from the purchaser at the time of the sale. Regulation 1668, Sales for Resale provides that if a purchaser wants to issue a blanket resale certificate, it may do so, and state on the resale certificate “see purchase order.” The purchase order then has to state that the sale was for resale.

Under the proposed amended regulation the purchaser can use the phrase “non taxable,” “taxable = no” or other similar terminology on the purchase order to indicate that the sale is for resale.

An article in the California Franchise Tax Board (FTB) November 2008 Tax News publication highlighted the other tax problems that can arise from a tax audit by the California State Board of Equalization (SBE or BOE). Many sales tax audits by the BOE result in a changes to a company’s gross receipts. The BOE tax auditors have instructions to provide the FTB with audit reports which show that not all sales were reported. In turn the FTB may open an income tax audit resulting in additional state income tax due.

Although not mentioned in the FTB Tax News article, when the FTB is done with its tax audit it routinely provides that information to the Internal Revenue Service (IRS), and the IRS may, in turn, begin a federal income tax audit. With all of these tax audits, and with potential tax penalties and interest there is the possibility that a business could wind up paying more to the taxing agencies then it took in.

For these and other reasons it is important to have a qualified tax attorney represent your business; especially if you believe that there are any significant issues on your California Sales tax returns. Feel free to call the tax problem attorneys at Brager Tax Law Group, A P.C.

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