Two recent sales tax decisions from the California Office of Tax Appeals offer cautionary warnings to restaurant owners, car dealers, and other businesses in cash-based or high transaction value industries The underlying themes for these cases are the need to keep accurate sales transaction records as well as to exercise caution during an audit. Your bookkeeping practices will be essential for avoiding unnecessary overpayment, financial penalty, or other punishment during a tax appeal.
The CDTFA has a very low burden of proof for imposing sales tax obligations based on the information it obtains from a taxpayer during an audit. A reasonable and rational basis is all that’s required. The taxpayer then has the burden of refuting the CDTFA’s assumptions to obtain a different tax outcome. The cases below showcase how taxpayers can struggle to obtain favorable tax appeal decisions without credible records or professional representation to challenge the CDTFA’s position.
Restaurant Sales (In the Matter of S. Yamvongsa and K. Khamthakhoun)
The taxpayer in this case was a Thai restaurant audited for tax years 2015 through 2017. During the audit, the taxpayer provided bank statements, federal income tax returns, incomplete guest checks, and incomplete credit card batch reports. However, the CDTFA had to create a book markup of the taxpayer’s sales because the records lacked sufficient detail and because the CDTFA expected a higher reported markup for a business in the restaurant industry. The CDTFA calculated the artificial markup using the taxpayer’s 2014 data, which resulted in a Notice of Determination for owed tax of $11,795 based on $164,003 in unreported taxable sales. The audit of the incomplete guest checks also revealed the taxpayer had collected excess tax reimbursement from customers.
The administrative law judges for the Office of Tax Appeals in this case accepted the CDTFA’s indirect audit approach (i.e., using an artificial markup) because the taxpayer failed to provide complete records to justify its original sales tax returns. Without any other evidence or justification from the taxpayer, the Office of Tax Appeals had no choice but to affirm the CDTFA’s calculation. The taxpayers also failed to provide any evidence to refute the CDTFA’s presumption that they collected excess taxes from customers based on the information found in the guest checks. This case shows taxpayers that having credible evidence of your transactions along with knowing how to understand that evidence are the keys to successful sales tax challenges. Without either, you will likely fight an uphill battle to defend against the CDTFA’s position before the Office of Tax Appeals.
Car Dealers (In the Matter of Vonzie Auto Sales)
In this appeal for a further reduction of unreported taxable sales, the taxpayer (a used car dealership in Sacramento) was unable to provide sales information to the CDTFA for one of the quarters within the audit period. Following a reaudit, the CDTFA relied on information from the taxpayer’s sales jackets, the DMV, and auto auctions that showed 119 additional purchased vehicles within the taxpayer’s inventory with no subsequent sale record for the audit period. As a result, the office of tax appeals approved the CDTFA’s assertions of unreported taxable sales for those vehicles totaling $236,567 (based on audit markup calculations).
The Office of Tax Appeals reasoned the burden was on the taxpayer to prove the ultimate disposition of vehicles within its inventory and their sales tax status. Also, worth mentioning was the Office’s unwillingness to rely on the absence of ROS forms filed with the DMV for the 119 vehicles as proof of non-sale. This further emphasizes the point that the burden lies solely with the taxpayer to prove their taxable sales within a period.
A Final Note on Your Sales Tax Records, Audit Defense, and Appeals
These recent cases from the California Office of Tax Appeals are an opportunity for business owners to reflect on their current sales tax practices and a reminder of the risks of an audit. California places the burden on you as the taxpayer to prove your sales history. When records are insufficient, the CDTFA has broad power to create its narrative about your sales based on available information, including from industry standards and outside sources. It’s possible the taxpayers in the cases above had good justifications for their reported sales, but without evidence, they were left to the mercy of the CDTFA’s calculations. If you recently received an audit notice, our professionals at Sales Tax Helper can provide a cost-effective defense to check CDTFA calculations and support your sales records to avoid excess tax liability.
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