A claimed sale for resale will be allowed in a CDTFA audit if it is supported by a resale certificate that is proper in form and is timely taken in good faith from a person who is engaged in the business of selling tangible personal property and who holds a California seller’s permit.
If the purchaser is not required to hold a permit because the purchaser sells only property of a kind, the retail sale of which is not taxable, (e.g., food products for human consumption). If the purchaser makes no sales in California, an appropriate notation to that effect will be entered in lieu of a seller’s permit number on the resale certificate under Regulation 1667 governing exemption certificate requirements.
A certificate will be considered timely if:
- it is taken at any time before the seller bills the purchaser for the property or,
- any time within the seller’s normal billing and payment cycle or,
- any time at or prior to delivery of the property to the purchaser.
CFA auditors can be stringent when enforcing the resale certificate requirement.
In an CDTFA audit, any document, such as a letter or purchase order, timely provided by the purchaser to the seller will be regarded as a resale certificate with respect to the sale of the property described in the document if it contains all of the essential elements in Regulation 1668.
A signed resale certificate that has been scanned and transmitted electronically or via a facsimile machine (faxed) is acceptable provided that it contains all of the information required by Regulation 1668, is timely and accepted in good faith, and contains the date and time of transmission and telephone number of the sender either on the document itself, or on the proof of transmission such as a copy of the email, or on the standard fax cover sheet.
One of the most common targets in a California sales tax audit is sales for resale. Sales for resale is the most common deduction claimed by California taxpayers and one of the most common targets of the CDTFA.
CDTFA sales tax auditors are especially careful in examining accounting methods used by taxpayers and use various procedures to verify amounts. Often, California taxpayers will estimate this deduction and will get tripped up in a sales tax audit when the CDTFA auditor uses their verification procedures.
Normally, there are two ways that a CDFA auditor will verify sales for resale.
First, if the claimed deduction consists of relatively few items so that all transactions can be examined in a reasonable amount of time, the California sales tax auditor will audit every item in detail. Consequently, if sales for resale are numerous and of a reasonably similar unit value, the verification will be made on a test or sample basis.
The auditor will develop perimeters for their test, such as a time period and a method for screening data. This test will then be imputed to the rest of the audit period.
California sales tax audits for sales for resale generally are broken down into three classification categories:
- Detailed audit — lists of claimed sales for resale available
- Detailed audit — lists of claimed sales for resale not available
- Audit on test basis
California Procedures for Detailed Sales Tax Audits Where Resale Data is Available
In the case of a detailed audit, and when a list of claimed resales is available, claimed resales will be summarized by months or by quarters in accordance with the taxpayer’s listings and records. The taxpayer’s detailed schedules will be used as a basis for the verification.
The auditor will examine sales invoices and other documentary evidence of the non-taxability of the sales, such as resale certificates, purchase orders, correspondence, or contracts.
The nature of transactions and the type and number of items purchased will be scrutinized to determine whether resale certificates appear to have been taken in good faith.
All sales questioned by the auditor for any reason will be listed on a subsidiary schedule. A copy of this schedule will be given to the taxpayer as an aid in attempting to support the exempt status of the questioned items.
A reasonable period of time must be given to the taxpayer to obtain this information before closing the audit.
If a list of claimed resales is not available, then the auditor will request the taxpayer to prepare a detailed listing of all claimed sales for resale and the taxpayer must be allowed a reasonable amount of time to do so.
If questioned resales are not supported by the taxpayer to the auditor’s satisfaction during a California sales tax audit, then those sales will be disallowed.
One special item of note. Sales to Mexican merchants for resale are allowable if certain requirements are met.
For example, a Mexican Merchant Identification Card must be valid and not expired at the time of the sale and the merchandise purchased for resale must be related to the special business classification codes on the card.