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Image of California State Board of Equalization LOGO

Orange County Sales Tax
Defense Lawyer

California’s State Board of Equalization (SBE) imposes sales tax on gross receipts from retail sales and requires the retailers and re-sellers to collect all sales taxes and then forward these collected taxes in a pre-determined and timely fashion to the State Board of Equalization.  The California Board of Equalization is also responsible for conducting sales tax audits and collecting unpaid sales and use taxes.

If you were audited and it was determined that you owe additional sales taxes you are in for a potential world of hurt. If a business, even a corporation cannot pay the amount of sales tax that it is assessed in a redetermination audit, the State Board of Equalization may hold individuals personally liable for the amount of sales tax owed. Often the Board will assess officers, directors, shareholders, and any other person who supervised the filing of sales tax return or the paying of sales tax. There is no requirement that the persons assessed is an officer of the company, and therefore even a part time bookkeeper or comptroller may be held personally liable for sales tax owed.

It is quite common for businesses to run afoul of the State Board Of Equalization unintentionally, often with no fault of their own, and sometimes because in hard times, such as our current economy, the sales taxes were not set aside but instead were spent for payroll or business operations and the business then under-reports the sales taxes owed opening a huge can of worms. The SBE auditors have had a lot of practice by millions of businesses – many of which set out to fool them. If you are facing a sales tax issue you really need to have legal counsel on your side.

State Board of Equalization Sales Tax Audits

When the State Board of Equalization conducts a sales tax audit they use a variety of different techniques depending on the type of business under audit.

Image of a bar ownerSome of the most audited businesses in California are bars and nightclubs where liquor is served. For example when the SBE performing a sales tax audit of a restaurant or bar the sales tax auditor may conduct an undercover “pour test” so as to determine a “base line” for that bar – to determine the average amount of alcohol that is poured in each drink at that establishment. The bar’s liquor purchase records are than examined, and that information can be used in conjunction with sale prices to determine the amount of estimated sales. Many crooked bar owners will buy some liquor for cash (i.e. no record of purchase) and then pocket a regular percentage of each day’s gross bar receipts attempting to skirt the sales tax laws.

No matter what type of business is being audited by the SBE, during the preliminary examination, the SBE sales tax auditor will generally want to compare the total sales recorded on the taxpayer’s books to the total sales reported on the taxpayer’s SBE sales tax returns and will, at their discretion often demand the taxpayer’s income tax returns and many other records.

Records generally requested by the State Board O Equalization tax auditor will likely include:

  • Bank statements
  • Cash receipts
  • General ledger
  • Balance sheets
  • Accounts receivable
  • Register tapes
  • Disbursement records
  • Purchase journals
  • Invoices,
  • Purchase orders
  • Inventory Record
  • Physical Inventory
  • Resale certificates
  • Exemption certificates

Sales Tax Audits – Don’t Do It Yourself (DIY)

Unfortunately, sales tax audits can be particularly costly to business-taxpayers, especially those that do not maintain adequate books and records to make their case. In addition to the additional taxes that might be determined to be due and payable, sales tax redeterminations may also lead to information sharing with the IRS and the Franchise Tax Board. This could potentially trigger other unfortunate and costly audits or lead to a presumption that income has been understated. Obviously, the State Board of Equalization can revoke your seller’s permit, which will shut down your business operations since it a crime to continue to sell goods without a valid sales tax permit. If you subsequently continue making sales after a sales tax permit suspension, you may be charged with a misdemeanor.

If the State Board of Equalization has contacted you in regard to a sales tax audit, it is strongly recommended that you hire an experienced tax attorney to help you prepare for your audit and be at your audit. Hiring an experienced tax attorney early in the audit process will ensure fair treatment during the audit and will give you an advantage if you need to file an appeal to contest the auditor’s findings.

Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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Member CA Bar Member Orange County Bar US Tax Court Attorney