When challenging a sales tax assessment, it is critical to have a state tax professional on your side. Simply making claims, with insufficient supporting evidence, will often lead to a court or tribunal to sustain the auditor’s sales tax assessment. While the taxpayer can claim that the auditor did it incorrectly, the state taxing agency will side with the agency so long as their calculation was reasonable.
Factual Background
Such was the case in a recent California CDFTA case called Herrera v. CDFTA. In Herrera, the taxpayer-owned a San Diego based restaurant. Although the taxpayer supplied income tax returns, income statements, and bank statements for the audit period, the auditor was not convinced that they were accurate. Specifically, the auditor found that the income statements exceeded the sales tax returns, the sales were higher than the purchases with an estimated markup, there were $350,000 of unexplained other income, credit card sales alone exceeded gross sales. As a result of the alleged unreported CDFTA assessed the restaurant about $80,000 in sales tax plus interest.
State Law
On appeal, the Office of Tax Appeals (“OTA”) reviewed the CDFTA’s assessment. For starters, the OTA explained that the CDFTA must make a case showing the facts it relied on to support its assessment. Under California law, restaurants sell primarily taxable prepared food items. See RTC § 6359; see also R&TC, § 6051 and RTC § 6091 (explaining that it shall be presumed that all gross receipts are subject to the tax until the contrary is established). As such, the auditor presumed all sales were subject to sales tax. Further, being that the auditor determined the sales were unreliable, so it used an alternative method to estimate total sales. After comparing the estimated gross sales to the reported sales, the CDFTA showed a large discrepancy resulting in tax of about $80,000 plus interest.
From there, the taxpayer must show the assessment is incorrect. (Concrete Pipe and Products of California, Inc. v. Construction Laborers Pension Trust for Southern California, 508 US 602 (1993); (Riley B’s, Inc. v. State Bd. of Equalization 61 Cal.App.3d 610.) (1976). Without any corroborating evidence, the California restaurant simply argued that the other income was nontaxable catering sales and that 95% of its sales were credit card sales
In comparing the arguments, CDFTA argued for its theory along with supporting evidence. Conversely, the restaurant simply argued its position without any evidence. On balance, OTA almost had to side with the Department.
Take-Aways
The recent Herrera decision is another example as to why it is so important to have someone well versed in sales tax help your business with its case against CDFTA. Not only is it important to know the law, but it is critical to submitting evidence to support your business’s theory of the case. Having a qualified representative to assist in this matter could have resulted in a completely different outcome for the restaurant. A sales tax professional can also provide some pressure to CDFTA to settle your case before trial as well.
Sales Tax Helper has over five decades of cumulative experience in assisting taxpayers who need to litigate their tax matters to get just results. Our firm focuses on the tough situations, the times when hard-hitting actions are needed to take a negative situation and get the very best out of it. Additionally, we work with CPAs and tax consultants whose clients need aggressive legal help when dealing with the CDFTA or other tax authorities. In fact, we have found that is not uncommon for the start of the controversy process to be the most effective settlement tactic the taxpayer has.
Resources:
- RTC § 6091
- R&TC, § 6051
- R&TC, § 6481
- Riley B’s, Inc. v. State Bd. of Equalization (1976) 61 Cal.App.3d 610,
- Schuman Aviation Co. Ltd. v. U.S. (2011) 816 F.Supp.2d 941, 950.
- Concrete Pipe and Products of California, Inc. v. Construction Laborers Pension Trust for Southern California (1993) 508 U.S. 602, 622.
- Riley B’s, Inc., supra, at p. 616.