Use of Form BOE-504 – Proving That a Sale Was Not a Resale
In a Board of Equalization audit, taxpayers should keep in mind that any of the evidence other than actual resale certificate, by itself is not the equivalent of a resale certificate timely taken in good faith, and may not relieve the seller of the liability for the tax.
In absence of any valid resale documentation, in a Board of Equalization audit, the auditor may determine that it is appropriate for a seller to use the Form BOE–504 series of forms (called “XYZ” Letters) procedure to help satisfy burden of proving that a sale was not at retail even though a valid resale certificate was not obtained or to substantiate a claim that taxpayer's customer paid the tax directly to the state.
When it is appropriate to use the “XYZ” Letter process, the auditor will provide the taxpayer with a copy of forms BOE–504–A, B, and C, or other type, if applicable. Various types of this letter are described on BOE's web-site. A response to an “XYZ” Letter inquiry alone is not necessarily enough to support a sale for resale. Generally, the “XYZ” Letter is not a substitute for a timely resale certificate, additional documentation or information may be required by auditor.
Board of Equalization Audit – XYZ Letter Procedure
A period of four weeks will be allowed by the Board of Equalization for the taxpayer to prepare and send the “XYZ” statements and for the customer to reply. It is recommended that the “XYZ” statements be returned directly to the Board of Equalization.
Auditor will provide taxpayer with appropriate forms and return envelopes. If the taxpayer elects to have the “XYZ” statements returned to them instead of Board of Equalization, then the likelihood of having Board of Equalization staff contact the customer or sending an additional mailing is greater. Generally, in a Board of Equalization audit, you would not want the auditor contacting the taxpayer’s customers.
The taxpayer may customize the “XYZ” cover letter. However, the use of a standardized “XYZ” statement will reduce any possible controversy over whether the proof provided is satisfactory. The taxpayer may ask their customers to forward payment of tax reimbursement if the transaction is identified as taxable. The statement should clearly state that the payment of tax be forwarded to the taxpayer and not the Board.
All modifications to the cover letter must be approved by the auditor’s supervisor. The “XYZ” statement must be used as provided by the auditor. The taxpayer’s customer is requested to return the completed “XYZ” statement within 10 days. Board of Equalization auditor may request a second XYZ letter to be sent, depending on circumstances. All customer's responses are part of the audit working papers and will be used in audit.
When XYZ responses are not returned, Board of Equalization audit staff will make every effort, if not already done, to determine the taxability of the questioned sale by alternative methods.
Auditor can examine the customer’s seller’s permit registration to determine whether or not the purchaser had a permit at the time of purchase; can review the quantity and type of items sold, review a subsequent resale certificate; can contact customer over the phone. Please note that the Board of Equalization auditor is allowed to accept or deny support contained in documents based on personal knowledge of the auditor gained from prior audits or other sources.
There are occasions when the taxpayer is unable to obtain an XYZ letter response because the customer is no longer in business due to a bankruptcy or other reason. In this situation only (but not in cases of corporate changes or reorganizations of customer) the sale will be considered a sale for resale if the property purchased by the customer is consistent with the type of sales the business makes.
If the sale appears to be of a type that could be consumed, the taxpayer is unable to obtain a proper XYZ letter response, and the auditor is unable to determine the exempt status of the sale by alternative means, the non-response will be treated by Board of Equalization auditor as an error.