The Board of Equalization is the California public organization that administers the state sales and use tax law and regulations. The BOE also conducts audits, collects unpaid California state sales and use taxes, and administers the state property tax.
There are presumptions of the tax code that the BOE follows in its operation and decision-making process. The BOE presumes:
- All sales are taxable unless specifically exempted
- Exemptions must be supported by documentation
- The taxpayer is responsible for maintaining and providing documentation in case of examination or audit
Who Pays Sales and Use Taxes?
In exchange for being allowed to retail tangible personal property, retailers must pay a sales tax, which is generally passed along to the buyer as part of the purchase price. The amount of sales tax due is measured by the gross receipts from total retail sales.
If someone in California purchases tangible personal property from outside the state and the seller does not charge state sales tax, the buyer owes something called “use tax.” Use tax is levied at the same rate as sales tax.
Use taxes are also levied on goods that make a stop in California in the course of being shipped from the vendor to the buyer, even if the goods did not originate there, were not purchased for use there, or if the buyer or eventual place of use is not in California.
Common Problems When Dealing with the Board of Equalization
When taxes are involved, there will be tax issues, either through ignorance or through deliberate efforts to keep from paying the tax.
Problem: General Sales Tax Issues
Generally, sales tax problems arise when you are trying to determine whether you need to pay sales or use tax. You might also think of it as whether you need to pay in-state versus out-of-state sales tax.
Confusion about when to pay sales tax often occurs when a retailer purchases items from an out-of-state vendor. The question is whether the retailer owes taxes on those purchases.
The answer is no, if the purchases are made for items that are for resale and the reseller holds a valid resale certificate. In other words, if the retailer was purchasing inventory that would then be resold to someone else it is tax exempt.
However, if the retailer takes an item out of inventory for his or her own use, sales tax is due on that item, regardless of whether it is to be used as a give-away, personal use by the retailer, or anything other than resale.
Other sales tax problems the BOE encounters are often found during an audit or examination of records. The auditor may find a difference between recorded sales and reported taxable sales. The reported sales may be lower than expected based on a mark-up for purchases.
Audits have also uncovered errors in compiling the tax return as well as differences between taxes accrued and taxes paid. Some retailers have maintained inadequate records, which resulted in unreported sales. In some cases, unsupported sales in interstate commerce were delivered to an in-state customer.
Problem: Calculating Use Tax
The proper calculation of estimated use taxes can be a problem. A use tax table is available that provides an estimated use tax liability, as calculated by the BOE, which an individual may use to report their use tax liability. It is available as an online tool.
Use taxes apply to the use, storage, or other consumption of items purchased outside the state and for which sales tax was not collected. It also applies to shipping goods that are delivered into the state for shipment elsewhere. The key here is the “ship to” address. If the address is within the state, no matter how long the goods were in California, a use tax is due.
Problem: Not Paying or Filing on Time
When you obtain your seller's permit, you will also be instructed to file your tax return on a periodic basis that is based on your reported sales tax or anticipated taxable sales at the time of registration. You may be required to file returns on a monthly, quarterly, or annual basis.
The return is due after the close of each reporting period, so if your period closes on June 30, your tax return and payment are due on July 31, the last day of the following month.
Payment and filing are required by the due date whether you e-file, mail, or hand deliver the return. Even you do not receive a return or a reminder from the BOE you are responsible for filing on time. If you cannot pay in full, you may be eligible for a payment plan; the payment plan will reduce or eliminate any penalties or fees that would arise from late payment otherwise.
The preference is that the balance is paid off within six months.
Problem: Poor Record-Keeping
You must be able to produce supporting documents for your return and potential audit. Here is a listing of some common documents and statements the BOE requires you to retain:
- Resale certificate
- Purchase orders
- Bills of lading for interstate commerce
- Delivery receipts
- Freight invoices
Whenever you sell an item to be resold by someone else, obtain the appropriate documentation from the purchaser such as a resale certificate. Retain any old certificates as well; maintain and update your records periodically.
- Sales invoices
- Cash register tapes
- Sales journals
- Purchase invoices
- Exemption certificates
- Working papers used in preparing your tax return
Keep track of your sales by comparing your recorded and reported taxable sales. If you find a difference, you must be able to resolve it or justify it. Bad debt, returned merchandise, and taxes paid on purchases resold before use can all cause a disparity.
Compare, also, tax accrued to tax paid to ensure no further issues.
If you receive notification of an audit, you will also receive a list of required documents to be prepared beforehand. The list typically includes account books, original supporting documents, and any certificates you require for business purposes such as your resale certificate and exemption certificate.
If you challenge the outcome of the audit and cannot come to an agreement with the auditor, the audit supervisor, and the BOE District Principle Auditor, you will receive a Notice of Determination from the BOE. Anytime in this process, you can access the Taxpayers’ Rights Advocate Office. You should receive assistance in determining contacts and required filings.
The BOE can be very aggressive in its audit and collection activities. If you receive notice of an audit or if you are challenging the outcome of an audit, you should call an experienced California tax attorney to help you navigate the system. You should also know you have access to a Taxpayers’ Rights Advocate.
A tax attorney can assist you with claims disputes, setting up payment agreements, and ensuring you understand your rights. You particularly need a tax attorney if you must file bankruptcy. It's possible your bad tax debt may not be discharged in this circumstance, and a tax attorney can help you with any waivers you are eligible to have.