You've been operating your business for years. You file and pay your taxes regularly–including sales tax. If your business ever has to undergo a state sales tax audit, you believe you'd fare well. After all, you have your records to back you up. But could you still end up with a hefty tax bill? Despite filing regularly and reporting sales tax, a California business found itself the recipient of an audit. This sales tax audit came with a giant tax bill. Here are the details of the case:
Sales Tax Audit Background
Corona Auto Mix Inc., a used car dealership, underwent an audit. During the audit, the California Department of Tax and Fee Administration (CDTFA) determined that the car dealership did not report its sales taxes properly. The CDTFA estimated that the car dealership had an additional tax liability of $58,189.60. Thus, they issued a Notice of Determination for that amount (in taxes and applicable interest). The car dealership appealed.
Corona Auto Mix had reported their total sales in the amount of $3,197,030 and claimed that $77,433 was the number of nontaxable sales for resale, making the total of their reported taxable sales $3,119,597.
During the audit, the car dealership did not supply the CDTFA with complete records of their sales tax. Corona Auto Mix provided sales journals and bank statements; however, they did not provide sales tax worksheets, deal jackets, or purchase journals. The CDTFA determined that the sales journals and bank statements were not enough to verify the car dealership's reported sales tax.
The CDTFA then obtained a Report of Sales (ROS) from the DMV and found that the car dealership had under-reported their taxes in the amount of $538,196 ($3,659,043 - $3,120,847.)
California Sales and Use Tax Law
Under California Sales and Use Tax Law, "ALL RECEIPTS are subject to tax until the contrary is established". Also, it is the responsibility of the retailer to make sure they keep complete and accurate records if audited.
In the case of the car dealership, however, they did not have complete records to present to the CDTFA. They claimed that they had the deal jackets, but that these were hard to copy and present to the CDTFA electronically.
California law also states that if the business did not provide sufficient proof, the CDTFA "may determine the amount required to be paid on the basis of any information which is in its possession or may come into its possession." (R&TC, §§ 6481, 6511.) In this case, it was the Report of Sales from the DMV that determined the car dealership's sales tax liability.
Because the car dealership, at the time of the audit, did not provide the CDTFA with all receipts: sales tax worksheets, deal jackets, or purchase journals, the court ruled in favor of the CDTFA. They found the car dealership's argument (of not being able to provide deal jackets because of inability to copy) insufficient and upheld the CDTFA's use of the documentation obtained from the DMV.
Commentary on the Court's Decision
The court understandably sided with CDTFA's action to deny the car dealership a petition for redetermination. Not providing all relevant information during an audit warranted the CDTFA to seek that information elsewhere. In this case, the DMV.
It's similar to an independent contractor under-reporting their wages and the IRS comparing the tax return to the 1099s issued to the contractor. Tax Administrations have the means and authority to check your business records against the official documentation of various institutions. As we learned with the case of Corona Auto Mix, providing only partial documentation during the audit still resulted in a decision where they had to pay sales tax in the amount of $$58,189.60. That's not a small chunk of change!
However, if the business painted a better picture during the audit or during the appeal, it is possible the assessment could have been reduced. We strive to provide the auditor what they need during the audit, while painting the business in the most favorable light. If we cannot reduce the assessment on audit, we attempt to fight the case on both a legal and factual basis to bring down the sales tax assessment.
Prepare for a Sales Tax Audit
Knowing which records business owners need to keep can be confusing, not to mention time-consuming. However, keeping complete and accurate records is the responsibility of all retailers. If you are confused about proper record-keeping when it comes to your sales taxes, we can help. Not only can we make sure that you're prepared during an audit, but withproper sales tax planning, we can also make sure you're not overpaying in taxes either. Contact us today to make sure you don't end up with a giant tax bill.