California Sales Tax Audit - Examination of Records

In a California sales tax audit, BOE will examine taxpayer's record to determine whether sales or use tax was not paid. The verification procedure will include an examination of debits in certain general ledger accounts. Auditor will examine various asset and expense accounts and will trace the originating documents. The auditor examine invoices representing purchases of significant taxable additions to fixed asset accounts. Unsupported debits to the fixed asset accounts will be questioned by the auditor and listed on a subsidiary schedule. The taxpayer must be provided with a copy of this schedule and given a reasonable period of time to obtain support for the items in question before closing the audit.

If no support is provided, use tax will be asserted against the taxpayer. As example, if the proper amount of use tax has not been paid to the Department of Motor Vehicles on the purchase price of a vehicle, the use tax is to be asserted against the purchaser. To establish purchases subject to use tax auditor will look at other records as well. For example, he or she will look at Business Property Statement that taxpayers are required to file with their county assessor’s office on an annual basis. The statement lists all equipment the taxpayer uses in his or her business along with the purchase price and acquisition date. Auditor will also examine journal entries and requisitions.

California Sales Tax Audit - Form BOE–503 – ABC Letter Procedure

During a California sales tax audit, the taxpayer may be able to prove that the questioned items were not subject to tax; or were reported in another reporting period; or the tax was paid by the vendor on their tax return or audit determination. To assist the taxpayer in satisfying their use tax obligation, the Board has developed the Form BOE–503 – ABC Letter Procedure (called “ABC Letter”). When it is appropriate to use the “ABC” Letter process, the auditor will provide the taxpayer with a copy of the BOE–503–A, B, and C.

The auditor must discuss the “ABC” Letter process with the taxpayer and explain that a satisfactory response to an “ABC” Letter inquiry alone is not necessarily enough to relieve the taxpayer from payment of the use tax, and that other evidence may be considered in reaching a conclusion. The auditor should also explain that since the “ABC” Letter is not a substitute for a receipt for payment of use tax, additional documentation or information may be required.

A period of four weeks will be allowed for the taxpayer to prepare and send the “ABC” statements and for taxpayer's vendors to reply. BOE recommends that ABC statements are sent directly to the Board. If this is the case, the auditor will provide the taxpayer with return envelopes with the address of his or her district or branch office. If the taxpayer elects to have the “ABC” statements returned to taxpayer, then he or she should keep in mind that the likelihood of having BOE staff contact the vendor or sending an additional mailing is greater.

During a California sales tax audit, the taxpayer may customize the “ABC” cover letter (BOE–503–B) by using the text contained approved by BOE on their own letterhead,. The text in the sample letter, which can be found at https://www.boe.ca.gov/sutax/manuals/am-04.pdf, should be used without additions, deletions, or changes. Any modification to the cover letter must be approved by the auditor’s supervisor. However, BOE advises that the use of a standardized “ABC” statement will reduce any possible controversy over whether the substantiation provided is satisfactory. The taxpayer’s vendor is requested to return the completed “ABC” statement within 10 days. Auditor, on his or her discretion, can require a second ABC Letter, if necessary. Upon receipt of the letter, auditor will check response for any inconsistencies. If inconsistencies are found then auditor will contact the taxpayer for explanation. The original “ABC” statement should be sent or faxed to the Board by the taxpayer’s vendor. If the completed “ABC” statements are to be sent directly to the taxpayer, the signed original will be examined.