Multistate tax issues are trying and confusing. We get it. But honestly, in today’s business environment, there are very few businesses that are limited to conducting business solely in the state where they are located, thanks to e-commerce.
Because of the complexities, many businesses discover the hard way that they are not in compliance with various states’ sales tax regulations. This is particularly true for companies that drop ship.
Fortunately for businesses in California, there is a glimmer of hope. California has a Voluntary Compliance Program. Business owners who know that they are in hot water with state sales tax can catch a break. This program will reduce the back tax burden and eliminate penalties.
The catch is that the taxpayer must not have been previously contacted by the CDTFA, BOE or other state agencies regarding tax issues. I am not going to sugar-coat this; acceptance is pretty difficult, but it is worth a try.
If you would like to learn more about California’s Voluntary Compliance Program, continue reading this chapter. Jot down your questions and we can hop on a call. I can help you figure out pretty quickly if you are eligible and we will take it from there.
Voluntary Compliance for Out-of-State Retailers
California has two voluntary disclosure programs: a) one for California in-state purchasers who fail to report use tax on purchases of tangible personal property from retailers outside of California and b) one for out-of-state sellers who fail to report sales tax. This chapter focuses on the latter.
The requirements the program are listed as follows:
- The seller must be located outside of California.
- The seller must have not previously registered as an entity engaged in business in California in accordance with Revenue and Taxation Code §6203.
- The seller must not have previously been contacted by the CDTFA regarding their activities in California.
- The seller must state that the reason for failure to pay California sales tax was due to reasonable cause and not negligence or intentional disregard of the law.
- The seller must voluntarily register with California.
The voluntary disclosure program is only for sellers who have never been contacted in any way by the CDTFA. This means that they cannot have received a letter, voicemail, or any other communication.
The CDTFA keeps a database of all contacts so as soon as the seller applies for the voluntary disclosure program, it will double check within its database for any prior correspondences. Even if the client was sent only one letter years ago, that is sufficient to disqualify them from this program.
The easiest method of determining if there was previous contact is to simply call the CDTFA and have them check their contact database.
Benefits of Voluntary Disclosure
One benefit of the voluntary disclosure program is that it limits the taxpayer’s exposure to liability for back taxes. In this program, only the prior three years of sales will be assessed. Without the program’s protections, the statutory period for assessing taxes against a seller may be extended up to eight years.
The state cannot later determine there were sales four years ago and assess the client for that prior year. The CDTFA is legally bound to not examine that year once the client is accepted into this program.
Furthermore, under this program, the seller will not have to pay the penalties owed. The CDTFA will waive late filing and late payment penalties. To apply for the relief of penalty, the seller will have to include a written request and set forth the facts regarding why the later filing occurred. Submit this request on the CDTFA 38 form.
If a seller wants to apply to the program, they may anonymously describe their circumstances to the CDTFA and obtain a written opinion as to whether the CDTFA will approve their voluntary disclosure request.
Therefore, taxpayers thinking of using this program can be more secure in the knowledge they will be admitted before disclosing any harmful information to the CDTFA.
The contact information for the Voluntary Disclosure Specialist who could give this opinion is as follows:
The request should include a description of how the client meets the qualifications for admittance into the voluntary disclosure program. It should also include a description of business activities, how products are marketed and sold to California customers, and a description of the flow of goods to the customer from the time an order is placed.
The first step to participate in the voluntary compliance program is to register with the CDTFA. The second step is to complete and submit a CDTFA-38, Application for Voluntary Disclosure, within 30 days of registration with the CDTFA. The application should be mailed to the following address:
You can print a form here and there is a list of mailing addresses for the different CDTFA offices within the state. You can also download a fillable form and submit it electronically.
The application will be approved or rejected in writing within approximately two weeks after the CDTFA’s receipt of the application. After approval, the seller will be required to electronically file their tax returns. The seller will then have to pay the tax and interest owed. The CDTFA agents running the Voluntary Disclosure Program will then assist the taxpayer in completing a Form 735, which will waive their penalties.
For more information and access to the relevant CDTFA application forms, please visit this link detailing the Out-of-State Voluntary Disclosure Program. Out-of-state businesses interested in this program may apply on an anonymous basis.
For out-of-state businesses that are interested in the voluntary disclosure program but do not qualify, another option is to apply for the Filing Compliance Agreement. Under this program, certain penalties may be waived but the state will not limit its investigation to a specific lookback period. More information about the program and instructions on how to apply can be found on the CDTFA’s Filing Compliance Agreement page.
California does not offer an amnesty program. However, if a seller has multistate issues, then it is beneficial to check if there are amnesty programs in other states where they owe liability. New York and Texas have both utilized amnesty programs in the past. For a complete list of the current jurisdictions that offer sales tax amnesty programs, please visit the Sales Tax Institute’s Sales Tax Amnesty Programs By State chart.
In the usual amnesty program, the state will tell sellers that they know the seller is out of compliance, but if the seller registers, then the state will not hold them liable for any back taxes. All the seller has to do is register and pay tax moving forward.
- Publication 178, Voluntary Disclosure Program
- CDTFA Publication 38, Application for Out-Of-State Voluntary Disclosure
- Publication 53, Managed Audit Program
- CDTFA Industry and Tax and Fee Guide
Qualifying for the Voluntary Compliance Program
Nobody wants to be on the receiving end of any contact from the CDTFA. The CDTFA is very aggressive about collecting sales tax and if you are out of compliance, they will find you.
If you have failed to file and pay any California sales tax, well, you are the perfect target for an audit or worse. Fortunately, California has a Voluntary Disclosure Program for California and out-of-state retailers, which can help absolve their sales tax debt and associated penalties.
If you believe that you qualify for the voluntary compliance program, contact me. Brotman Law has helped many small businesses get accepted into the program. This is really a matter that you should not try to tackle yourself. Let our experience guide you through the process towards a successful outcome.