1. State Board Of Equalization Avoiding Common Sales and Use Tax Pitfalls
Before we can help you to avoid errors in reporting let me tell how we know where the errors are occurring.
Board runs audit program to ensure businesses report neither more nor less tax than required.
In the fiscal year the sales and use tax audit program disclosed net deficiencies of more than 375 million and more than 104 million in sales and use tax refunds.

2. Presumptions of the Tax Code
All sales are taxable unless otherwise specifically exempted
Claimed exemptions must be supported by documentation
Taxpayer is responsible for maintaining and providing documentation for potential examination
Law section states “ burden of proving that a sale is exempt is on the person making the sale.
§ 6091

3. Analysis of Noncompliance
As required by the Taxpayer’s Bill of Rights, the Board annually reports:
Area where taxpayer noncompliance is highest AND the types of businesses making the errors.
Two categories have topped the lists in recent years:
Failing to pay use tax on purchases from out of state vendors
Making sales for resale without required documentation
Each year as part of our annual report an Analysis is made of the areas of noncompliance based on audits for the same time period.
The areas of noncompliance are taken directly from areas of assessment per the tax audits.
Whenever there is an assessment from a tax audit, the auditor has to code, by area, where the assessment, was derived

4. Types of Noncompliance ( As of June 30, 2007)
Untaxed Purchases from Out-of-State Vendors
2. Unsupported Sales for Resale
Unreported Sales to Employees
Difference Between Recorded and Reported Taxable Sales
5. Errors in Compiling Return
6. Reported Sales Lower than Markup on Purchases
7. Inadequate Records Resulted in Unreported Sales
Untaxed Materials & Fixtures Consumed on Construction Contracts
Withdrawal from Resale Inventory for Own Use
Unsupported Sales in Interstate Commerce Delivered to Instate Customer
These are the top ten areas of noncompliance per the Annual Report for the fiscal year
I will discuss each area and how to avoid problems in that area

5. Types of Noncompliance ( As of June 30, 2007)
Untaxed Purchases from Out-of-State Vendors
Unsupported Sales for Resale
Unreported Sales to Employees
Difference Between Recorded and Reported Taxable Sales
5. Errors in Compiling Return
6. Reported Sales Lower than Markup on Purchases
7. Inadequate Records Resulted in Unreported Sales
Untaxed Materials & Fixtures Consumed on Construction Contracts
Withdrawal from Resale Inventory for Own Use
Unsupported Sales in Interstate Commerce Delivered to Instate Customer
The first two areas are #1 Untaxed Purchases from Out-of-State Vendors and #9 Withdrawal from Resale Inventory for your own use

6. Untaxed Purchases From Out of State Vendors
Items purchased without payment of California tax:
From out-of-state businesses and
Purchased for own use (not inventory)
Fixed assets, consumable supplies
If out of state vendor does not charge CA tax, the purchaser owes the use tax on the purchase price

7. Withdrawal from Resale Inventory for Own Use
Inventory items purchased with a resale certificate without payment of tax
Items withdrawn from inventory for use other than resale (including use as gifts and free samples or for personal use)
Use Tax Due on Cost =
Resale Inventory
Provide samples of your merchandise for give away, or donate
owe tax on cost
journal entries from inventory to marketing expense, R & D, etc.
Analysis of the California Sales and Use Tax Law

8. This is where it is reported on the return.
Reported on Line 2 of the sales tax return as “purchases subject to use tax”
Keep documents disclosing how you arrive at the amount on line 2, and you may want to keep a copy of the purchase invoice and attach it to the back of the return for your records. For resale withdrawals, keep expense account or journal entries
As individuals we also responsible for reporting and can do this on our Franchise Tax Board return or A BOE Individual Use Tax Return

9. Use Tax for Individuals
Can be reported on BOE individual use tax return
Can be reported on California Income Tax return

10. Types of Noncompliance ( As of June 30, 2007)
Untaxed Purchases from Out-of-State Vendors
2. Unsupported Sales for Resale
Unreported Sales to Employees
Difference Between Recorded and Reported Taxable Sales
5. Errors in Compiling Return
6. Reported Sales Lower than Markup on Purchases
7. Inadequate Records Resulted in Unreported Sales
Untaxed Materials & Fixtures Consumed on Construction Contracts
Withdrawal from Resale Inventory for Own Use
Unsupported Sales in Interstate Commerce Delivered to Instate Customer
#2 on the list is Unsupported Sales for Resale

11. Sales For Resale
Common ways to document sales for resale (examples to follow):
A Resale Certificate
A Purchase Order containing all the essential elements of a resale certificate
Resale Card
Keep your resale card file up to date but do not throw out resale cards
Maintain and update cards periodically
Regulation 1668

12. Basic Elements of a Resale Certificate
Purchaser’s name
Purchaser’s address
Purchaser’s valid seller’s permit number
Purchaser’s type of business activity
Seller’s name
Item(s) being purchased
Statement that purchase is “for resale”
Date resale certificate is signed
Authorized purchaser’s signature
Purchaser’s title
Doesn’t matter what form important has all elements.
Regulation 1668

13. Resale Certificate Verification
To verify Seller’s Permit number(s) submitted on resale certificates, retailers may call or access our website at

14. Resale Certificate Verification

15. Resale Certificates
Available at some stationery stores, in Regulation 1668, and in Publication 73
Must be filled out completely
Must be taken timely and in good faith
Timely= before seller bills purchaser, within seller’s normal billing cycle, or payment cycle, any time prior or upon delivery of the item
Good faith responsible for questioning whether or not an item is for resale. If customer insists obtain a specific description of property.
Regulation 1668

17. Purchase Order Used as a Resale Certificate
For Resale
SR AC
Number -
123456
Taxable
Date -3/5/00
4000
Widgets
$2.00 each $
Must specifically state “For Resale.” Statements of “Nontaxable,” “Exempt,” or “Taxable - No” do not fulfill this requirement
Purchase Orders that state “For Resale” must contain the same information as required for a resale certificate
Regulation 1668

18. About a Seller’s Permit
Allows sales to be made in California
Allows a person to issue a resale certificate for purchases of inventory items without paying tax
Does not allow buying items for personal or business use without paying tax
Permit must be issued in the owner’s name for each business address
CALIFORNIA SELLER’S PERMIT
SR AC
JOE SMITH
JOE’S BA R
Copy of the permit does not shift the responsibility of tax to the purchaser, only a resale certificate will do that.
Regulation 1699

19. Penalties for Improper Use of Resale Certificates
Misuse of resale certificate is a misdemeanor
The penalty is $500 or 10% of the amount of tax per transaction whichever is greater
I audited a business that had three different purchases totaling about $2000. They had to pay a $1500 penalty for $2000 worth of purchases. The tax would have been about $150. Give more details
Regulation 1703

20. Types of Noncompliance ( As of June 30, 2007)
Untaxed Purchases from Out-of-State Vendors
2. Unsupported Sales for Resale
Unreported Sales to Employees
Difference Between Recorded and Reported Taxable Sales
5. Errors in Compiling Return
6. Reported Sales Lower than Markup on Purchases
7. Inadequate Records Resulted in Unreported Sales
Untaxed Materials & Fixtures Consumed on Construction Contracts
Withdrawal from Resale Inventory for Own Use
Unsupported Sales in Interstate Commerce Delivered to Instate Customer
#3 is Unreported Sales to Employees

21. Unreported Sales to Employees
If you sell items to your employees, tax is due on the selling price charged
Sales to your employees must be reported on your sales and use tax return `

22. Types of Noncompliance ( As of June 30, 2007)
Untaxed Purchases from Out-of-State Vendors
2. Unsupported Sales for Resale
Unreported Sales to Employees
Difference Between Recorded and Reported Taxable Sales
5. Errors in Compiling Return
6. Reported Sales Lower than Markup on Purchases
7. Inadequate Records Resulted in Unreported Sales
Untaxed Materials & Fixtures Consumed on Construction Contracts
Withdrawal from Resale Inventory for Own Use
Unsupported Sales in Interstate Commerce Delivered to Instate Customer
#4 is the Difference Between Recorded and Reported Taxable Sales

23. Recorded vs. Reported Taxable Sales
Comparison between taxable sales per your books and records and taxable sales reported to the Board.
Tax auditor will compare the taxable sales you have recorded in your books and records and taxable sales you have reported on your return.
Recommend you make a periodic comparison between recorded and reported.
Should be the same, make notes for any differences.

24. Types of Noncompliance ( As of June 30, 2007)
Untaxed Purchases from Out-of-State Vendors
2. Unsupported Sales for Resale
Unreported Sales to Employees
Difference Between Recorded and Reported Taxable Sales
5. Errors in Compiling Return
6. Reported Sales Lower than Markup on Purchases
7. Inadequate Records Resulted in Unreported Sales
Untaxed Materials & Fixtures Consumed on Construction Contracts
Withdrawal from Resale Inventory for Own Use
Unsupported Sales in Interstate Commerce Delivered to Instate Customer
#5 is simply errors in compiling the return

25. How to Avoid Common Errors Preparing your Return
Before preparing your return, read the return instructions.
Allow yourself enough time to carefully prepare the return.
Double check your mathematical calculations. The Board’s no cost e-file system does the math for you.
Include your account number and reporting period on the return.
Remember to sign and date your return before mailing it to the Board.
Report sales on an accrual basis, not a cash basis.
Advise the Board when ownership changes. This may affect an existing liability or future tax.
If you have questions, contact the Board of Equalization at for assistance.

26. Benefits of E-filing It’s fast It’s convenient It’s accurate
It’s paperless

27. E-Filing Eligibility for Sales and Use Tax Accounts
Most accounts are eligible (over 850,000)
Single-outlet retailers
Includes mandatory Electronic Funds Transfer (EFT) accounts (April 2008)
Multiple-outlet retailers (July 2008)

28. Filing a sales and use tax return has never been easier, faster or more convenient!
For more information, log on to our website and click on the E-file logo.
Select sales and use tax e-filing for the list of approved service providers.

29. Types of Noncompliance ( As of June 30, 2007)
Untaxed Purchases from Out-of-State Vendors
2. Unsupported Sales for Resale
Unreported Sales to Employees
Difference Between Recorded and Reported Taxable Sales
5. Errors in Compiling Return
6. Reported Sales Lower than Markup on Purchases
7. Inadequate Records Resulted in Unreported Sales
Untaxed Materials & Fixtures Consumed on Construction Contracts
Withdrawal from Resale Inventory for Own Use
Unsupported Sales in Interstate Commerce Delivered to Instate Customer
#6 is Reported Sales Lower than Markup on Purchases

30. Reported Sales Lower than Markup on Purchases
Generally involves cash businesses (markup audits) Grocery Stores, Liquor Stores, Restaurants, etc. Involves total sales, cost of goods sold, and profit amount $100,000 Sales ,000 Cost of Goods Sold $20,000 Gross Profit $20,000/$80,000 = 25% Markup
The difference between total sales per the federal income tax return and cost of goods sold is gross profit. Profit divided by Cost of Goods sold is the markup which is an indicator of whether total sales and/or cost of goods are consistent and whether additional work needs to be done.
If the markup is considered low for the type of industry, sales can be impeached and it may be necessary to develop a true markup and apply to cost of goods (purchases). This results in audited total sales and is compared to total sales reported.
In this example, if we found out actual markup is 40%, we would take 80,000 purchases, multiply by markup factor of 140% to arrive at $112,000 projected sales. Which amounts to a deficiency of $12,000.

31. Types of Noncompliance ( As of June 30, 2007)
Untaxed Purchases from Out-of-State Vendors
2. Unsupported Sales for Resale
Unreported Sales to Employees
Difference Between Recorded and Reported Taxable Sales
5. Errors in Compiling Return
6. Reported Sales Lower than Markup on Purchases
7. Inadequate Records Resulted in Unreported Sales
Untaxed Materials & Fixtures Consumed on Construction Contracts
Withdrawal from Resale Inventory for Own Use
Unsupported Sales in Interstate Commerce Delivered to Instate Customer
#7 is having Inadequate Records which results in Unreported Sales

32. Adequate Books and Records Will: Inadequate Books and Records Will:
BOOK AND RECORDS
Adequate Books and Records Will:
Help you run your businesses more effectively
Help you complete more accurate tax returns
Inadequate Books and Records Will:
Force and Auditor to use estimates in your audit

33. Required Records Records of sales including: sales invoices,
cash register tapes, sales journals, etc.
Records of purchases including: purchase invoices, cancelled checks, purchase journals, etc.
Documentation to support claimed exemptions such as: resale certificates, exemption certificates, purchase orders, shipping documents, etc.
Normal books of account
Schedules or working papers used in preparing tax returns
Records must be maintained for at least four (4) years
Regulation 1698

34. Types of Noncompliance ( As of June 30, 2007)
Untaxed Purchases from Out-of-State Vendors
2. Unsupported Sales for Resale
Unreported Sales to Employees
Difference Between Recorded and Reported Taxable Sales
5. Errors in Compiling Return
6. Reported Sales Lower than Markup on Purchases
7. Inadequate Records Resulted in Unreported Sales
Untaxed Materials & Fixtures Consumed on Construction Contracts
Withdrawal from Resale Inventory for Own Use
Unsupported Sales in Interstate Commerce Delivered to Instate Customer
#8 is Untaxed Materials & Fixtures Consumed on Construction Contracts

35. CONTRACTORS Construction Contract Types of Contractors
Contractors in general
United States Construction Contractor
Types of Contracts and Billings
Materials – generally contractor is consumer
Fixtures – generally contractor is retailer

36. Types of Noncompliance ( As of June 30, 2007)
Untaxed Purchases from Out-of-State Vendors
2. Unsupported Sales for Resale
Unreported Sales to Employees
Difference Between Recorded and Reported Taxable Sales
5. Errors in Compiling Return
6. Reported Sales Lower than Markup on Purchases
7. Inadequate Records Resulted in Unreported Sales
Untaxed Materials & Fixtures Consumed on Construction Contracts
Withdrawal from Resale Inventory for Own Use
Unsupported Sales in Interstate Commerce Delivered to Instate Customer
#10 is Unsupported Sales in Interstate Commerce Delivered to Instate Customers

37. Sales in Interstate Commerce
Common ways to document sales in interstate commerce:
Bills of Lading
Freight Invoices
Delivery Receipts
Correspondence

38. Unsupported Sales in Interstate Commerce Delivered to Instate Customers
Delivery to a purchaser in California for subsequent shipment to another state is taxable.
When the goods are diverted by the purchaser in transit, the exemption is lost.
Delivery by common carrier.
Drop shipments.
These are examples of when we commonly see lack of documentation

39. Services Available BOE Website -- www.boe.ca.gov Local Board Offices
Library of BOE information
Links to other CA websites
On-line Verification of Seller’s Permit numbers
Local Board Offices
BOE Information Center
/TDD Mon. - Fri. 8am to 5pm
24 hr fax-back service
Commonly requested forms and publications to choose from automatically faxed back to you
24 hr voice recordings on specific topics
Taxpayers’ Rights Advocate
If you have been unable to resolve a disagreement with the Board, or if you would like to know more about your rights under the law

40. Taxpayer Educational Consultation Program
Designed to provide sales & use tax info. to new taxpayers during 1st year.
Eligible if: A new business (<1 yr), Filed at least two BOE returns, You report monthly, quarterly or quarterly prepay. No annual filers.
He is here if you would like more information about this program

41. THANK YOU FOR COMING