Message Thread:
Calif Sales Tax Audit
3/11/16
Has anyone been audited for Calif sales tax? How did it go, how detailed was it, how long did it take, did the auditor know what they were doing?
3/12/16 #2: Calif Sales Tax Audit ...
It's routine. It does not take long, IIRC.
They seem competent to me.
They will probably want to see what percentage of a job is installation and if you charged correctly for the jobs that are taxable.
3/12/16 #3: Calif Sales Tax Audit ...
One of the first thing they will look at is your out of state purchases that don't have tax applied and equipment purchases.
They will do a ratio analysis of some of your jobs and sales tax paid and if its out of wack you will need to provide the details.
As Pat said if you are installing work then the tax basis is different. Also if the invoice says
Cabinets 8000
Delivery 500
Sales tax (on the 8500)
installation 1500
Then they just confirm correct districts etc.
If you pay tax on materials and sell cabinets without install you owe tax on the difference.
A-
3/12/16 #4: Calif Sales Tax Audit ...
Alan, I understood that if installation was 10% or more of the total, then you charge tax on materials only. Another thing I do is a lump sum contract that does not show sales tax broken out as a line item. And I just bought a used CNC machine out of state, and did not pay tax, am I supposed to?? I don't pay sales tax on other purchases out of state, although I bought a used motorcycle out of state, and had to pay sales tax at registration.
3/12/16 #5: Calif Sales Tax Audit ...
Lump sum with installation as more than 10% is tax on materials only. You will need shop hours /cost and installation hours cost as a proof so 900 in shop labor 150 in installation passes
If you have any that are close then you can ply overheads and expenses to get to the 90/10.
You owe use tax (sales tax on equipment) on the CNC, it might qualify for the 4.1875 rate reduction in the link below.
You owes sales/use tax on other purchases from out of state.
A-
PARTIAL EXEMPTION CERTIFICATE FOR
3/12/16 #6: Calif Sales Tax Audit ...
more on the sales tax exemption can be found here
Manufacturing and Research & Development
3/12/16 #7: Calif Sales Tax Audit ...
Many Thanks, Alan. I was aware of the partial exemption, but I thought it applied if I bought in California. I'm glad you confirmed the 10% on materials. Weren't you the one who had a long drawn out issue with the Board of Equalization a few years ago?
3/13/16 #8: Calif Sales Tax Audit ...
Slam,
We had an audit a long time ago and they told us to pay tax on everthing but installation, a few years later I was at a Saturday Breakfast with some other shops and we had a notice for an audit and I asked about the 90/10 rule and everyone had been audited and everyone was told to do it differently. I did some research and we ended up getting about 60K plus 15k in penalties back.
We had to reconstruct all the job data and do the 90/10 proof on a different random samples of jobs ( this was in 88 or 89) so it was in Lotus and it took a lot of time
A-
3/13/16 #9: Calif Sales Tax Audit ...
Have a good friend of the family that works for State of Cali Tax board.
He told me, if the dollar amount is under $10,000, they don't even bother.
Just my .02
3/14/16 #10: Calif Sales Tax Audit ...
rescraft,
Once they schedule an audit and show they need to generate enough income to make it worth while or get out of there quickly. We had an auditor here for 6 weeks once, this was in the early 2003/4 and they did ratio analysis and thought we owed them 90 grand, then they looked at leased machines and we hadn't paid the tax (the lease company did and wrapped it into the lease so we could get an exemption at the time).
Long story short they walked out of here with $900 bucks. Must of cost them 30k to get that $900.
3/16/16 #11: Calif Sales Tax Audit ...
We're going through this right now. We're a licensed C-6 contractor in California. We do lump sum contracts. We buy our material and pay tax at time of purchase. We did not tax the customer, which is ok, IF we did the instalation, which was always more than 10% of the job. They are going after the jobs we did not install ( 15-20% of our business) and calling us a retailer for those. Telling us we we're supposed to tax our labor, overhead, profit, ( basically everything other than the material we already paid tax on ) on the jobs we did not install. Thinking about seeking council, but can't seem to find anybody other than the guy on the radio. I'll take any advice I can get, as for right now, its a large amount of money we don't have. And no, the original auditor had no clue how the laws worked. We met with her 3 times, and then finally went to the city to her supervisor.
3/16/16 #12: Calif Sales Tax Audit ...
I don't know about the BOE but with the IRS I have used a guy who was an ex IRS agent that then negotiated the bill and kept them off of my back. I would guess there is something similar for the BOE.
3/16/16 #13: Calif Sales Tax Audit ...
I have been highly aware of this tax law for quite a while, thanks to Woodweb, and Alan F's . The only difference is we don't pay the sales tax when we purchase, and we charge the customer tax on the marked up amount of the materials. I wonder if we have been overpaying! I'm not sure what you can do to get out of paying the tax, especially if the auditor has the records, or copies of them....
3/16/16 #14: Calif Sales Tax Audit ...
BG,
You owe tax on the sales amount when you don't install or its free standing or takes less than 10% to install ( unless it ships out of state or is sold to someone with a resale number). I doubt you can win a fight on this unless they told you differently some point along the line.
A-
3/16/16 #15: Calif Sales Tax Audit ...
Slam,
You are overpaying, if there is no documentation to the customer that shows the amount of tax paid or charged, they owe you a refund.
For lump sum you should be paying tax on your COST of materials. The amount of tax is determined by the district you install in.
If I was you I would put your audit off a little bit and prepare all your documentation showing what you owe (out of state ) simple cover sheet or report on jobs showing the assembly /install is more than 90/10.
Then show tax paid and amount that should have been paid. You will have to go thru all this for every job to get money back so you may as well do the work before the audit starts.
You would owe a penalty on the out of state stuff and they used to penalize themselves for over payments.
A-
3/16/16 #16: Calif Sales Tax Audit ...
Thanks Alan. Lesson learned, and it sucks, but at least 80% of what we did, we did right, and that means not taxing the customer. Can you input on taxing overhead and profit as well? The SBOE is telling me I have to pay tax on that too...
Here's an example.
Kitchen - 50,000 to client (not installed)
Design time 2,000
Material 25,000
labor 13,000
overhead 4,000.00 ( rent, elec, etc )
Profit 6,000.00
3/17/16 #17: Calif Sales Tax Audit ...
BG,
Design labor is taxable when it is related to the sale of taxable material, so the kitchen design labor is taxable, if you design a patio that someone else builds then that labor isn't taxable. Other than that its just like buying a TV at Wal-Mart. You are making a retail sale. You proposals should read
1 Set of Custom cabinets $50,000.00
1 Delivery to xyz 1,200.00
Sales tax on 51,200 $4,608.00
Total $55,408.00
Then if they compare you to a Big Box its detailed the same.
If you sell to a decorator with a resale certificate then there is no tax.
The sales tax is based on the delivered location, so a Kitchen delivered to Nevada has no CA sales tax.
Overhead and profit really don't come into play.
Replacing a hinge on a door, only the hinge is taxable.
3/17/16 #18: Calif Sales Tax Audit ...
BG,
This is one we proposed last week
A-
Click the link below to download the file included with this post.
Sample_Proposal.pdf
3/17/16 #19: Calif Sales Tax Audit ...
Thanks for taking the time, Alan. I don't know where I'd be without Woodweb. You guys rock. I'll go face the music, and keep on going.
5/10/23 #20: Calif Sales Tax Audit ...
Website: http://mapquestdrivingdirections.app
The audit process can vary in terms of its level of detail and length depending on the scope of the audit and the complexity of the business's tax situation.
5/10/23 #21: Calif Sales Tax Audit ...
Alan is a real loss to this forum
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