California has increasingly spread its sales tax net to both in-state and out-of-state businesses profiting from its large economy. This means that if you're conducting business in the state, as a non-resident or resident, you might be on the hook to collect and pay California state taxes. The California Department of Tax and Fee Administration (CDTFA) offers a voluntary disclosure program to out-of-state and in-state retailers to encourage them to fulfill their sales tax obligations. This gives a second chance to anyone who finds they've made a mistake in complying with the collection and remittance of their sales taxes.
California Voluntary Disclosure Program
California provides both in-state and out-of-state voluntary disclosure programs. The out-of-state voluntary disclosure program is an agreement between California and out-of-state retailers who are liable for collecting sales and use tax for doing business in the state. The in-state voluntary disclosure program allows qualified retailers within the state to report and pay sales and use tax to the department owed over a three-year period.
The retailers need to come in willingly and be open about what they owe. Then, the state offers to minimize the burden of the tax, such as waiving late filing or payment of penalties. The program is under the guidance of the Revenue and Taxation Code section 6487.05, which became applicable on January 1, 1995.
Benefits and Risks of the Voluntary Disclosure Program
- The key benefit of the program is that the CDTFA shortens the look-back period for unpaid taxes to three years. This is a sign of good faith on the part of California This is also is a big win if you've been running your business for many years. Sometimes, even with good intentions, you may miss out on deadlines or have missing information in your reporting, leading to the unfortunate predicament of back taxes. If not for the program, then your business would be audited for a statutory period of eight years.
- Secondly, you're entitled to the waiver of late filing of taxes as well as late payment of penalties. To obtain penalty abatement, you need to first register with the CDTFA and then provide complete facts on the CDTFA 38 form.
- In addition, you're allowed to minimize exposure as a business owner. The CDTFA lets you present your case anonymously; they then provide their opinion through a letter if you qualify for the program. This allows you to determine the right information to submit to the CDTFA as a way to protect your business.
- There's a likelihood that your business will be audited since most states require that a VDA discloses any taxes to be recovered from the company. When participating in VDA, typically you're required to provide full disclosure such as the company's profile, sales records, and evidence that the company collected but didn't remit sales taxes.
- The other downside is the company is guaranteed to pay back taxes. However, if they don't do the VDA, they may never get audited. There is also a cost to the VDA, which may not outweigh the penalty.
Qualifications for Voluntary Disclosure Program
In general, in-state and out-of-state retailers both have to meet basic social requirements to qualify for the program.
In-State Retailer Requirements
- You have not registered with the agency before and reside in the state.
- Have never filed an individual use tax return.
- Don't meet section 6015 definition of engaging in business in the state.
- Have not reported using tax amount in your individual income return.
- You've approached the agency voluntarily.
- The CDTFA has not made contact over not reporting the use tax as per section 6202.
- Your purchase does not include a vehicle, aircraft, or vessel.
- Lastly, you have a valid reason for not paying tax or filing a return.
Out-of-State Retailer Requirements
- You have never registered with the CDTFA and live outside the state.
- Meet section 6203's definition of engaging in business in California.
- Made a voluntary disclosure request with the CDTFA.
- Have never been in contact with the CDTFA or its agents about their activities in the state.
- Were not neglectful or had ill intentions for not paying taxes or filing returns.
Always keep in mind that the CDTFA has the upper hand in pursuing any business that does not meet its tax obligation for ignoring nexus conditions. If this happens, it will be the start of the stressful process of the department being in your business and issuing a huge tax bill, plus penalties. Fortunately, this is avoidable if you take advantage of the voluntary disclosure program to make up for past mistakes. However, it's wise to align your business with the state tax laws from the start to avoid problems later on.
If you're generating income in the state of California and are concerned if you are risking a state assessment, Sales Tax Helper can help. Our team is proficient in handling California sales tax matters for all types of businesses in California, placing you in safe hands. Talk to us today.