This blog walks you through each step of California’s protest / appeal process and discusses the key things to consider after receiving a Notice of Determination (NOD) or a Notice of Jeopardy Determination from the California Department of Tax and Fee Administration (CDTFA).
Step 1 – Deciding whether to appeal or pay your CA sales tax assessment.
Sometimes it’s clear that you’ve been over-assessed by the state, like California, which makes the decision to protest the assessment easy. Other times, however, the answer isn’t so obvious. Over the many years we have done sales and use tax work, we have seen many instances where the state either misinterprets the meaning of a sales tax law or misapplies the correct meaning during an audit. As you can imagine, the results are very damaging to the taxpayer. Unfortunately, unless the taxpayer has a sales tax background or has their assessment reviewed by someone who does, the issues go uncontested.
If you haven’t already, make it a priority to have a state sales tax professional review your sales and use tax assessment issues that should be challenged. Do not skip this step and just assume that the auditor was fair, honest, and accurate with their assessment. Businesses frequently wind up overpaying the state because the business owner or their accounting staff were not well versed in the sales tax laws that, if challenged, could have reduced your California sales tax liability.
Once you’ve talked with a California sales tax professional and you know where you stand, you have a business decision to make. Typically, the decision to appeal or pay an assessment hinges on the amount of money at issue vs the cost of the appeal process, after factoring in the type and complexity of the issues to be challenged. Either way, don’t let a pushy auditor or the appeal process intimidate you.
We recommend scheduling a free 30-minute sales tax assessment review with our sales tax experts. Whether you hire our firm or not, we offer a thorough and honest evaluation for free so you can decide how to proceed with knowledge and confidence.
Step 2 – Identify your filing deadline.
If you decide to appeal your sales tax assessment, you need to do so within the time allowed. Generally, an appeal (or a “petition for redetermination,” as the CDTFA calls it) must be filed within 30 days of the Notice of Determination (NOD) issuance. Although, this timeline can be shorter in some cases. It’s imperative that you identify the correct deadline and file your appeal before that date.
In the event you miss your 30-day deadline to file a California Petition for Redetermination, all hope is not lost just yet. You may have another 30 days to challenge the audit findings with the judicial or administrative court. After that, the assessment becomes final and it becomes very difficult, if not impossible, to reopen the case.
Once this point is reached, your last option would be to pay the taxes and fees assessed and subsequently file a claim for a refund. That said, recovering money already paid is an uphill battle to put it lightly. If a payment is not made and an appeal is not filed by the deadline, additional penalties and interest will likely be assessed.
Step 3 – Identify factual issues and present supporting evidence.
CDTFA auditors are often trained to take a shotgun approach during California sales and use tax audits. In addition to writing up findings without sufficient evidence, this tactic leads to broad generalizations and gross overestimations of your business’ total revenue and sales taxes due. As a result, your ‘notice of field report’ or ‘notice of field investigation’ can show distressingly high figures. Don’t agonize just yet, though, as this report along with the auditor’s findings can provide the insight needed to successfully challenge the assessment.
Your key insights here will come from identifying what the auditor deems to be taxable and the steps you need to take to build a winning appeal. While finding what the auditor believes to be taxable is clearly stated, seeing the roadmap for your appeal can be tough if you don’t handle these issues regularly. Nonetheless, you’ll want to pick out the auditor’s assumptions and estimations that increase your tax liability and assemble evidence to the contrary.
Examples of common factual issues that can be resolved with documentation alone include:
- Exemption issues (i.e., exemption or resale certificates).
- Out-of-State Sales (i.e., sales made outside of California).
- Sales or purchases in which California sales tax was already paid.
Issues like these can easily be resolved by providing the proper documentation, such as proof of export (shipping documentation) or proof sales tax was paid (invoices).
Factual issues are worth resolving with the auditor because they do not require judgement calls. However, if you cannot get them resolved with the auditor, they should be brought up during the Petition for Redetermination.
Step 4 – Identify legal issues and make your case.
Protesting to reduce the amount of your tax liability is certainly worthwhile, but real, long-term progress is made when you successfully argue that what you’re selling isn’t taxable at all! Now, before you assume that the state of California knows how to administer their own tax laws and dismiss this point, you should know that auditors are trained to liberally apply the agency’s tax rules during audits, subscribing to the “when in doubt, write it up” mantra. What’s more, the agencies charged with implementing and enforcing the tax laws often misinterpret and overstep their bounds in the rulemaking process.
One of the most frequent legal issues we find is businesses being inappropriately assessed sales tax on the presumption that the product sold is tangible property when it is in fact real property, which is not taxable. Another example we frequently see is the taxing of a service (not taxable) as though it’s a product (taxable). Of course, these “mistakes” aren’t being made in favor of the taxpayer. At Sales Tax Helper, our team has successfully appealed hundreds of sales tax cases on the basis of law, and we can do the same for you.
Unless you have someone in-house that is well versed in California’s sales tax law and experienced in handling these matters, it’s well worth your time to at least talk with a sales tax professional about your assessment. It costs you nothing more than a half-hour of your time and could save your business significantly in the long run.
Step 5 – Double-check interest and penalty calculations
Take a few minutes to double-check the auditor’s penalty and interest calculations for accuracy. And before wrapping up your petition, you should consider protesting any penalties that have been assessed. Even if you agree with parts of the assessment and those calculations are correct, it doesn’t mean you should pay a penalty for an honest mistake. It’s not uncommon to win this issue and receive a waiver. This is a relatively easy addition that can reduce the total amount you owe.
Step 6 – Perfect and submit your petition.
If you’ve decided to take the DIY route, you should consider having a sales tax professional review your California petition for redetermination with you before submitting. You’re going to turn over documentation to the state that will be used against you if possible. So, unless you’re fully confident in your ability to handle the issue, it’s a good idea to at least bounce it off someone with more experience.
At a minimum, your petition should include the following:
- Your tax or fee program account number.
- Identify the amount(s) of the assessment that you are protesting.
- The factual and legal reasons what you do not owe the taxes / fees being assessed.
- Reasons why the penalty and/or interest assessed should be waived (if you are petitioning the penalties and interest); and,
- Your signature or the signature of your authorized representative.
Although it’s not required, you may include a request for an appeals conference and/or for your case to be considered under CDTFA’s Administrative Settlement Program. Once complete, you can file your petition online via the CDTFA’s website at www.cdtfa.ca.gov. California’s Business Tax and Fee Division (BTFD) will send you a letter confirming receipt of your petition.
Step 7 – Review by the CA Business Tax and Fee Division & Petition conference.
At this stage, the BTFD will refer your case to an Appeals Bureau attorney or auditor who has not previously been involved in your case. The appeals conference is a discussion of relevant facts and applicable law concerning your appeal made in the presence of the Appeals Bureau attorney or auditor. After the appeals conference, the Appeals Bureau will issue a decision containing its analysis and conclusion for your case. While the petition conference is intended to be held by a ‘neutral 3rd party,’ the reality is that this person is also a state employee and the conferences frequently end with a decision in favor of the State.
If you disagree with the Appeals Bureau’s decision, there are additional levels of review and appeal that you can pursue, as discussed below.
Step 8 – Appealing a California notice of determination or redetermination.
If you disagree with the Appeals Bureau’s decision, you can do one of two things:
The first option is to submit a request for reconsideration to the Appeals Bureau. This must be done within 30 days of the date of the letter explaining your options for appeal. After submitting supplemental arguments, the Appeals Bureau will issue a supplemental decision.
Option 2 is to appeal to the California Office of Tax Appeals (OTA), which must also be done within 30 days. This avenue is a more formal appeal before a three-member panel of administrative law judges that will issue a decision after hearing each party’s position. The case is then referred back to the CDTFA to be closed in accordance with the OTA’s decision.
While all of this sounds exhausting and complex, don’t intimidated by the process, its well within your reach. The Sales Tax Helper team is here to provide you with the level of support you need for each stage of the sales tax audit and appeal process. We regularly tailor our services to meet our client’s needs, from answering questions and providing guidance in the background to full administrative and legal representation.
Whether you need a sales tax attorney or consultant, Sales Tax Helper matches the service to meet your needs. Contact us today at 866-458-7966 for a free consultation.