The Ultimate Guide to California Sales Tax Audits

If you are a small or mid-size business owner in California selling tangible personal property, you should be collecting and reporting sales tax. You also have to file sales tax returns with the state of California.

In our experience, most businesses try to do things correctly when it comes to their sales and use tax compliance.

The last thing that pretty much every company wants is to run afoul with the California Department of Tax and Fee Administration. Formerly the State Board of Equalization, in 2017 the CDTFA took over administering sales tax liabilities.

However, sales tax in an area of the law that is confusing to many people, including tax attorneys that do not focus on state taxation. Even for people that try and stay compliant with the sales tax laws, your business can still be a target for the CDTFA and be hit with a California sales tax audit.

That is why our law firm has dedicated the time and the resources to creating our complete guide to California sales tax audits. Our tax professionals wanted to compile our knowledge in defending these types of cases in order to help you as much as possible.

We simply wanted to put together the best resource on the internet for taxpayers faced with the prospect of a CDTFA audit. The California state government publishes little guidance to help those facing audits and there is a lot of misinformation out there.

We have also noticed that when speaking to businesses and business owners that many people do not really understand the audit process. So, we decided to tackle this issue head on and to reveal many of the tips, tactics, and strategies that we use in our law firm for dealing with sales tax problems.

Although our ultimate guide is fairly daunting and some of the material is rather technical, it is not our intention that you sit down and read this cover to cover. Rather, we have broken everything down into a smaller, easy to digest chapters that cover different aspects of the sales tax audit process and to give you a better understanding of what the law is and how to deal with your tax auditor.

As always, our tax law firm is about trying to help people and we are always here if you have questions or need further assistance. One of the reasons that we publish these resources is to help not only our clients, but anyone who stumbles upon our website and is in need of a helping hand.

Regardless of whether or not you have the means to retain a California sales tax audit lawyer to help you with your CDTFA audit, we want you to not be on an unequal playing field with the auditor, so have written down and shared some of our best sales tax audit defense tactics and sales tax audit strategies to help you.

Thank you in advance for reading “A Tax Attorney’s Complete California Sales Tax Audit Guide.” It was a labor of love and our law firm welcomes all questions, comments, concerns, and feedback that you may have about this free resource.

A sales tax audit is exactly what it sounds like; the California Department of Tax and Fee Administration (CDTFA) comes in and checks to make sure that sales tax was paid properly. Any errors will result a notice of determination being sent to the taxpayer and a resulting increase in sales tax liability, interest and penalties.

The goal of an audit is to find misreported or unpaid taxes which have been neglected either in error or through tax evasion.

Exactly how an audit is conducted varies depending on the type of business being audited, but at a minimum, it includes an examination of records such as sales and use tax returns and worksheets, state and federal income tax returns, ledgers, invoices, statements, till receipts and more.

What does the sales tax audit process look like? Sales tax audits are pretty rough. They involve large amounts of data, complicated statistical methods and in certain cases, they involve sampling.

This means that the state can go through a business’s records and other documentation supporting their sales over three years and audit every single transaction, but the problem with a lot of businesses, particularly a lot of retail businesses, is cash transactions.

The auditor and the representative are working through this very large amount of data, records and documents and are trying to make conclusions on it to make sure the appropriate amount of tax was paid in statement.

During the course of your California sales tax audit, the auditor will examine bank statements and look at any sales tax exemptions that you may have that would support exempt sales.

For some businesses, you can have tens of thousands, if not, hundreds of thousands, even millions of transactions over a three-year period. We see businesses all the time, particularly those with low margins and high frequency, that just have an absolutely insane amount of transactions.

In some cases, tax auditors may use other types of tests such as markup analysis, statistical sampling, credit card percentage tests, and even undercover operations such as “pour tests” in bars and restaurants.

A sales tax audit can happen for any reason; sometimes it is just your turn to be audited. However, there are many circumstances that may make it more likely that you will be selected.

If your business is largely cash-based, if you work in an industry known for high rates of non-compliance, if one of your vendors has been audited or if you have had tax problems in the past, you may be at greater risk of a sales tax audit.

If you have recently gone out of business, you can still be audited, and the CDTFA will attempt to hold you and anyone else directly involved personally responsible for found liabilities.

Most California businesses will deal with a sales tax audit at some point, and understanding why and when sales tax audits happen and what to expect is the best way to be prepared when your number comes up.