California is among 45 states that have imposed sales tax on retailers doing business in the state. The California Department of Tax and Fee Administration (CDTFA) administers the sales tax rate at 7.25% (6% state and 1.25% city and county funds). With just 6% of the sales tax going to the state, a larger portion of the tax collected is added to the General Fund, while the rest is for the Local Revenue Fund. By law, any seller dealing with sales of tangible property must register with the CDTFA to charge and collect sales tax, including gas stations and convenience stores.
California Sales Tax Basics for Gas Stations and Convenience Stores
Generally, gas stations and convenience stores in California handle varying types of tangible property that is liable to sales tax. California boasts $37.3 billion in market size, in 2021, for gas stations with convenience stores. This means customers can access gas, buy groceries, get ready-to-eat foods, and other goods and services all under one roof.
California exempts the following grocery items normally sold in convenience stores and gas stations:
- Milk
- Candy
- Ice cream
- Fruits and vegetables
- Ready-to-go cold sandwiches
- Cold meats
- Water and juice
- Chips and crackers
- Kombucha tea (with less than 0.5% alcohol)
- Hot baked goods(except if sold in one package with hot prepared foods or hot beverages)
It is important to note that any food heated in a microwave oven is taxable, including tax-exempt foods. At the same time, the microwave oven needs to be placed in a location accessible to the customer or behind the counter.
Food Items in Gas Stations and Convenience Stores
On the other hand, there are other everyday food items that are taxable:
- Alcoholic beverages
- Kombucha tea ( with 0.5% and more alcohol)
- Ice
- Carbonated water and soda
- Majority of hot prepared foods
Non Food Items
Publication 31, Grocery Stores provides an exhaustive list of taxable and non-taxable grocery items. Aside from grocery items, there are other tangible goods (non-fuel items) subject to tax except lottery ticket sales:
- Cigarettes and tobacco products
- Non-prescription medicines
- Books, newspapers, and magazines
- Automotive supplies
- Greeting cards
This also includes non-fuel sales of prepaid wireless phone cards and services that are chargeable to prepaid mobile telephony services, sub charge, and cigarette buy-downs.
For purchases, issuing a resale certificate for items purchased for resale is liable to sales tax upon selling for retail. Sales tax also applies when a business purchases items to promote it, such as displays and storage equipment. However, one is liable to use tax if they purchase a taxable property in the state and not put it up for resale, but other uses. Gasoline and diesel sales are generally taxable with each category having specified rules, including exemption.
Overall, the CDTFA provides more detailed information on tax issues that relate to the operations of gas stations and convenience stores.
Steps to Prevent an Assessment or Audit for Gas Stations and Convenience Stores
Comparison Between Your California Sales Tax Return and Other Data
Do a comparison between your California Sales Tax Return and other data relevant to the audit. It is important to have access to data such as federal income return and 1099-k to be a step ahead of the auditor. When you have confirmed the accuracy of the data, compare it with your sales and use tax return. Preferably, you can engage our sales tax experts to help you. We are capable of resolving any inconsistencies that may arise by amending returns or filing for voluntary disclosure.
CDTFA Voluntary Disclosure Program
Take advantage of the CDTFA voluntary disclosure program if you have incomplete or inaccurate records or if your 1099-k's and your federal income tax return significantly exceed your sales tax returns. The voluntary disclosure program will protect gas stations and convenience stores against penalties. Notably, the CDTFA encourages those with tax liabilities to take part in the program before they are contacted directly by officials.
Prepare
Make adequate preparations before the audit commences. Set the groundwork for the audit process from the moment you receive an audit notice from the CDTFA. At the very least, have your 1099-k's, POS reports, and California sales tax returns for the period of audit. Do not freely hand over any documentation if the auditor asks if it will lead to higher sales amounts. Be prepared to have ready answers should you issue any documents.
Account for Nontaxable Sales
Carefully account for nontaxable sales for gas stations and convenience stores. Tips are usually included as the top taxable items in your 1099-k. Note that the 1099-k gives records of the total dollars received through a credit card from a specific bank. Make sure you have a breakdown of the tips to prevent the auditor from considering the whole report as taxable. In case you lack documentation confirming tips, use your IRS W-3 report which shows tips paid to employees.
Documentation
Take note of the documentation availed to the auditor. For a sales tax audit, you do not necessarily have to provide all the information. It is enough to fully collaborate with an auditor provided you do not offer access to information that could have costly consequences. At the minimum, avail documents that report your sales. We have observed restaurants that over-provide documents to the CDTFA, which can be costly. The CDTFA will likely generate an overstated sales tax assessment if they have access to more documentation. It is wise to be fully prepared to deal with the audit before handing over documentation. Alternatively, you can work with a sales tax professional who understands what documentation is relevant to submit to an auditor.
Contact a Professional
Do not take any action or pay for an assessment before getting in contact with a professional who understands the California sales tax audit. In California, making a payment, or signing an audit report, or a waiver of restrictions, among others, automatically waives your right to a review of your audit.
Learn More About Sales Tax for California Gas Stations and Convenience Stores
Gas stations and convenience stores should expect increased auditing as the California Department of Tax and Fee Administration is proactively seeking more third-party reporting. It is important to have an idea of how the CDTFA conducts its audit process, including the information they can access. It helps to avoid facing any huge sales tax liability if it is expected.
For this reason, it is recommended to seek a professional to resolve the matter through amending a return with inconsistencies or filing for voluntary disclosure. Working with sales tax professionals helps if you receive an audit notice or you are trying to find a way to minimize your sales tax liability. Schedule a call with one of our sales tax experts.