Sales Tax & The California Board of Equalization
Restaurants & Bars
The restaurant and bar industry is frequently targeted by the BOE for a sales tax audit. Generally, the audit will encompass a four (4) year period and will review the businesses practices and possible areas of exposure that the State can utilize. For instance, it is not uncommon for the BOE to require purchase invoices and the mark up method, thus comparing the purchases of products and their selling prices. Obviously, these numbers may vary for a number of reasons; however, the State will require a thorough explanation of each variance.
We also see a lot of confusion in the sales tax rates that are required by food trucks, deliveries, catering, gratuities, and staff meals.
Restaurants have slim profit margins, every dollar counts. A sales tax audit can result in large assessments of tax, penalties and interest. These can threaten the viability of remaining open.
Our law firm has had success representing bars and restaurants in sales tax matters and in keeping their doors open, while resolving the dispute.
Triggers for Sales Tax Audits
The Construction industry is a favorite of the BOE to audit because California's Sales and Use Tax laws when applied to construction contracts are dependent on the type of contract, how materials are purchased, machinery and equipment, and the installation methods employed.
Out-of-State - Nexus
The BOE aggressively identifies and targets out-of-state companies to determine if business is taking place in California. If the BOE believes that you are doing business in California, even if you disagree, the company will be assessed sales tax on all sales made in California for up to eight (8) years.
Thus, if a company has nexus in California (or another state) the company may be required to register, file, and pay business taxes (i.e., income, franchise, sales). While nexus is interpreted differently from state to state, generally, the term simply refers to the minimum contacts an out-of-state company must have before being subject to the State Tax laws.
The State will attempt to create a nexus in various ways:
- Economic nexus is enough, no need for a physical presence in state
- Minimum threshold of receipts (i.e., in California if sales exceed $500,000 or make up more than 25% of the total sales)
- In-state employees
- Attending trade shows and seminars
- In-state deliveries made by one's own truck
- Incidental ownership of property
- Click-through - In California, if you advertise on a website through an affiliated type program and that website is hosted in California, you may have nexus in California.
Obviously, it is important to determine if you are subject to sales tax in California. If you are and you have not registered with the state, collected, and paid over sales tax, or you have not complied with use tax laws, you should discuss with a tax attorney the implications and your legal options. For instance, the California Board of Equalization (BOE) currently has a Voluntary Disclosure Program for out-of-state companies to satisfy their use tax obligations. This may be one option for you to explore.
However, most of our clients dispute that they are subject to tax in California and wish to contest nexus arguments. Our firm has been successful in resolving nexus disputes at the audit level.
The California State Board of Equalization (BOE) is charged with enforcing Sales and Use Tax laws and regulations. We frequently represent businesses and owners with respect to sales tax audits, sales tax evasion investigations, delinquent sales tax returns, and delinquent sales tax payments.
Generally speaking, California has a system for selecting taxpayers to receive sales tax audits, and they often use a variety of selection methods within that system, such as size, sales volume, industry, a tip-off, or ownership transfer.
Frequently Audited Industries
Restaurants & Bars
Out-of-State - Nexus
California Sales Tax Investigations & Procedure
Sales Tax Penalties
It is possible to have penalty charges waived or abated under certain circumstances.
The types of penalties are as follows:
Responsible Officer Penalty (aka, corporate officer liability)
Don't let the name fool you, in most states, personal liability for failing to collect or pay over sales tax is not limited to officers. In fact, in most states, personal liability can attach to anyone who has responsibility for collecting and paying sales tax.
Late Tax Returns and Late Payments
The BOE will assess a tax penalty of 10% if you do not file your tax return by its due date and a 10% penalty if your tax payment is late. (The penalty will not exceed 10% of the amount of tax due.)
Negligence or Fraud Penalties
The BOE can assess penalties of 10% - 25% if it believes the tax was not reported due to fraud or an intent to evade the law.
40% Penalty - Failure to Pay Collected Sales Tax
A 40% penalty can apply if you collected the sales tax but did not pay it over to the State of California.
50% penalty – Operating Without a License
The 50% penalty applies to taxes that should have been paid but the business was operating without a valid California license.
Related Content, from the Moskowitz Blog: Sales Tax Audits, A 3 Part Series