The California Department of Tax and Fee Administration
The State California Department of Tax and Fee Administration (CDTFA) is a publicly-elected tax commission charged with the administration of sales and use taxes, property taxes and special taxes. It also acts as an appellate body for franchise and income appeals. Here, we are concerned with the sales and use taxation element of the CDTFA.
A Brief Intro to the California Sales Tax Process
The CDTFA (or sometimes the SCDTFA), is the State body responsible for issuing and administering sales licenses, permits and use accounts, as well as overseeing sales tax audits and the collection of any unpaid sales and use taxes.
Anyone who sells goods or services in California is required to:
- Obtain the correct sales permit from the CDTFA
- Collect sales and use tax at the appropriate rate at the point of sale
- File regular self-reported sales tax returns to the CDTFA on a monthly, quarterly or annual basis
- Pay any sales and use tax due at the close of each reporting period
In theory, reporting and paying sales tax is a simple process, but in practice, it can be anything but. There are a thousand small ways that businesses can miscalculate or underpay the sales tax due to the CDTFA.
All it takes to put you on shaky ground with the CDTFA is a bookkeeping oversight or a moment of crisis where funds set aside for sales tax are spent to cover payroll or pressing invoices. Oftentimes, liabilities and mistakes, once started, continue to snowball and become much worse than the original error. .
Who Pays Sales and Use Taxes?
In exchange for being allowed to retail tangible personal property, retailers must pay a sales tax, which is generally passed along to the buyer as part of the purchase price. The amount of sales tax due is measured by the gross receipts from total retail sales.
If someone in California purchases tangible personal property from outside the state and the seller does not charge state sales tax, the buyer owes something called “use tax.” Use tax is levied at the same rate as sales tax.
Use taxes are also levied on goods that make a stop in California in the course of being shipped from the vendor to the buyer, even if the goods did not originate there, were not purchased for use there, or if the buyer or eventual place of use is not in California.
Who Can Get a California Sales Tax Exemption?
If you own a business which produces tangible goods, then you are obligated to pay sales tax to the California Department of Tax and Fee Administration. There are, however, a number of exemptions to this rule, some of which apply to various types of goods and others which attach to certain buyers.
It is important to understand which types of business can get a partial or full sales tax exemption and the consequences for improperly failing to pay sales or use tax. Sales tax is a complex area of law, with a huge range of exemptions that apply to various goods or types of sellers.
Penalties for failing to pay sales tax are steep, so a little knowledge now can keep you from a huge liability later.
Sales Tax and Owing the CDTFA
Sales taxes are imposed on individuals and businesses who sell goods or services in the state of California. The amount of the tax is calculated by determining the gross receipts of a business, minus any exempt (non-taxable) sales. The sales and use tax rates are the same, and are subject to change.
In addition to the state sales tax rate, various local jurisdictions add additional municipal sales tax rates. These district rates increase the total sales tax owed by a business, and must be remitted to the CDTFA along with the basic California rate. You can see an updated list of the state and district sales tax rates on the CDTFA website.
Taxable retail sales in California include “tangible personal property,” which covers a huge range of items: clothing, furniture, toys, housewares and much more, including digital goods such as the finished artwork for a website. Service and labor costs can also be taxable if they “result in the creation of tangible personal property.”
Use tax is the other side of sales tax, and it refers to the purchase of items from out-of-state retailers for use in California. This means that if your business is outside California, you are still required to collect use tax on any items you sell in California, and then remit the funds to the CDTFA.
There are a wide variety of items which are exempt from sales tax in California, including certain foodstuffs intended for human consumption, prescription drugs, and sales to the U.S. Government.
The rules and regulations surrounding exempt sales are complex, and this is a frequent point of trouble for businesses who do not understand what items are exempt and how to document exempt sales properly. A helpful guide to exempt sales is available from the CDTFA.
Businesses are allowed to collect sales and use tax from their customers at the time of sale, but to do so they must list the amount of sale tax reimbursement separately on receipts or invoices, or state on a posted sign, price tags and/or other printed material for the customer that sales tax is added to all price.
If you are dealing with a sales or purchase agreement, that agreement must specifically call for the addition of sales tax to the purchase. It is important to note that while you can charge your customers sales tax, failing to do so does not absolve you from paying sales tax to the CDTFA. The responsibility for paying sales tax rests only on the business owner.
Common Problems When Dealing with the California Department of Tax and Fee Administration
When taxes are involved, there will be tax issues, either through ignorance or through deliberate efforts to keep from paying the tax.
Problem: General Sales Tax Issues
Generally, sales tax problems arise when you are trying to determine whether you need to pay sales or use tax. You might also think of it as whether you need to pay in-state versus out-of-state sales tax.
Confusion about when to pay sales tax often occurs when a retailer purchases items from an out-of-state vendor. The question is whether the retailer owes taxes on those purchases.
The answer is “no” if the purchases are made for items that are for resale and the reseller holds a valid resale certificate. In other words, if the retailer was purchasing inventory that would then be resold to someone else it is tax exempt.
However, if the retailer takes an item out of inventory for his or her own use, sales tax is due on that item, regardless of whether it is to be used as a give-away, personal use by the retailer or anything other than resale.
Other sales tax problems the CDTFA encounters are often found during an audit or examination of records. The auditor may find a difference between recorded sales and reported taxable sales. The reported sales may be lower than expected based on a mark-up for purchases.
Audits have also uncovered errors in compiling the tax return as well as differences between taxes accrued and taxes paid. Some retailers have maintained inadequate records, which resulted in unreported sales. In some cases, unsupported sales in interstate commerce were delivered to an in-state customer.
Problem: Calculating Use Tax
The proper calculation of estimated use taxes can be a problem. A use tax table is available that provides an estimated use tax liability, as calculated by the CDTFA, which an individual may use to report their use tax liability. It is available as an online tool.
Use taxes apply to the use, storage or other consumption of items purchased outside the state and for which sales tax was not collected. It also applies to shipping goods that are delivered into the state for shipment elsewhere. The key here is the “ship to” address.
If the address is within the state, no matter how long the goods were in California, a use tax is due.
Problem: Not Paying or Filing on Time
When you obtain your seller’s permit, you will also be instructed to file your tax return on a periodic basis that is based on your reported sales tax or anticipated taxable sales at the time of registration. You may be required to file returns on a monthly, quarterly or annual basis.
The return is due after the close of each reporting period, so if your period closes on June 30, your tax return and payment are due on July 31 — the last day of the following month.
Payment and filing are required by the due date whether you e-file, mail, or hand-deliver the return. Even if you do not receive a return or a reminder from the CDTFA, you are responsible for filing on time. If you cannot pay in full, you may be eligible for a payment plan. The payment plan will reduce or eliminate any penalties or fees that would arise from late payment otherwise.
The preference is that the balance is paid off within six months.
Problem: Poor Record-Keeping
You must be able to produce supporting documents for your return and potential audit. Here is a listing of some common documents and statements the CDTFA requires you to retain:
- Resale certificate
- Purchase orders
- Bills of lading for interstate commerce
- Delivery receipts
- Freight invoices
Whenever you sell an item to be resold by someone else, obtain the appropriate documentation from the purchaser such as a resale certificate. Retain any old certificates as well; maintain and update your records periodically.
- Sales invoices
- Cash register tapes
- Sales journals
- Purchase invoices
- Exemption certificates
- Working papers used in preparing your tax return
Keep track of your sales by comparing your recorded and reported taxable sales. If you find a difference, you must be able to resolve it or justify it. Bad debt, returned merchandise and taxes paid on purchases resold before use can all cause a disparity.
Also, compare tax accrued to tax paid to ensure no further issues.
If you receive notification of an audit, you will also receive a list of required documents to be prepared beforehand. The list typically includes account books, original supporting documents, and any certificates you require for business purposes such as your resale certificate and exemption certificate.
If you challenge the outcome of the audit and cannot come to an agreement with the auditor, the audit supervisor, and the CDTFA District Principal Auditor, you will receive a Notice of Determination from the CDTFA. Anytime in this process, you can access the Taxpayers’ Rights Advocate Office. You should receive assistance in determining contacts and required filings.
The CDTFA can be very aggressive in its audit and collection activities. If you receive notice of an audit or if you are challenging the outcome of an audit, you should call an experienced California tax attorney to help you navigate the system. You should also know you have access to a Taxpayers’ Rights Advocate.
A tax attorney can assist you with claims disputes, setting up payment agreements and ensuring you understand your rights. You particularly need a tax attorney if you must file bankruptcy. It’s possible your bad tax debt may not be discharged in this circumstance, and a tax attorney can help you with any waivers you are eligible to have.
Do You Need California Sales Tax Defense?
The California Department of Tax and Fee Administration (CDTFA) is the California public organization that administers the state sales and use tax laws and regulations. The CDTFA also conducts audits, collects unpaid California state sales and use taxes, and administers the state property tax.
There are presumptions of the tax code that the CDTFA follows in its operation and decision-making process. The CDTFA presumes:
- All sales are taxable unless specifically exempted
- Exemptions must be supported by documentation
- The taxpayer is responsible for maintaining and providing documentation in case of examination or audit