Recent downturns in the economy and consumer spending have caused a decrease in the number of Sales and Use Tax collected by the California Board of Equalization (BOE). According to the most recently published annual report on the BOE’s website, the total Sales and Use Tax revenues for the 2007-2008 fiscal year was $44.3 billion—down 1.5% from the previous year’s Sales and Use Tax revenue of $45.1 billion. Like most governing bodies, the State of California is looking for stricter enforcement of the current laws and possible expansion of the Sales and Use Tax.
One way to increase Sales and Use Tax revenues is through audit enforcement. The BOE compliance staff collected over $800 million in delinquent Sales and Use Taxes for the 2007-2008 tax year. While this may be an intimidating thought for anyone receiving a notice of a pending audit, there is some good news. The purpose of the BOE audits is to ensure that businesses report neither more nor less tax than required. Last year, for example, taxpayers received Sales and Use Tax refunds of more than $116.1 million.
Businesses cannot always look for good news from the BOE. Penalties and/or additional interest may be imposed for a number of different reasons, including but not limited to:
- Failure to file when the BOE determines that you should have filed,
- Late tax return filings, late payments or late prepayments,
- Failure to remit Sales or Use Tax collected from customers,
- Improper use of a resale certificate,
- Operation of business without proper permits or licenses,
- Accuracy related penalties.
The penalties and interest vary based on the type of violation, whether a tax was intentionally avoided and the amount of time that has passed. A moderate 10% penalty will apply to all those that fail to file a return, send in late payments, file their return late, or are determined to be negligent. Also, failure to pay the correct amount will result in a 10% penalty on any additional tax due. Heavier penalties will apply for fraud and attempt to evade paying the required Sales and Use Tax. General fraud and tax evasion will result in a 25% fine while one’s attempt to evade the necessary taxes by registering a vehicle, vessel, or aircraft outside of California will result in an additional 50% fine, not to mention potential criminal implications.
Online Retailers and New Legislation
Another way to increase revenue is by requiring more collection and payment of sales tax. A recently proposed bill in the California legislature targeting online retailers – AB 2078 – would have mandated collection of sales tax from any online retailer that was part of a larger group if one other member of that larger group was required to collect sales tax as a retailer doing business in California. It would also have required online retailers to notify their customers that they are responsible to pay California sales tax on their own if the online retailer was not required to collect it. You can read the bill here: http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_2051-2100/ab_2078_bill_20100624_amended_sen_v95.pdf
Even though this bill did not pass and was placed in the inactive file, online retailers should not rest easy quite yet. Democrats in the California legislature have revived talks of writing a new law that would require out-of-state online retailers to collect and remit sales tax for all items advertised by California-based websites. They believe that it could add needed revenue to help close the budget gap. Opponents, however, believe that companies would simply stop using California-based advertising firms—decreasing revenue and potentially causing the unemployment rate to increase even further. Whether or not this bill ever comes to fruition, we can be sure that the government will continue looking for ways to increase revenue through Sales and Use Tax.
We routinely represent individuals and businesses with pending and in anticipation of State of California tax matters. Please contact me and/or my firm to discuss your matter.