State Board Of Equalization Avoiding Common Sales and Use Tax Pitfalls

1. State Board Of EqualizationAvoiding Common Sales and Use Tax Pitfalls

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 § 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

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

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

6. Untaxed Purchases From Out of State Vendors Itemspurchased without payment of California tax: • From out-of-state businesses and • Purchased for own use (not inventory)

7. Withdrawal from Resale Inventory for Own Use Items withdrawn from inventory for use other than resale (including use as gifts and free samples or for personal use) Use Tax Due on Cost = Inventory items purchased with a resale certificate without payment of tax Resale Inventory Analysis of the California Sales and Use Tax Law

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

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 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 Regulation 1668

13. Resale Certificate Verification To verify Seller’s Permit number(s) submitted on resale certificates, retailers may call1-888-225-5263or access our websiteatwww.boe.ca.gov

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 Regulation 1668

17. 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 Purchase OrderUsed as a Resale Certificate PURCHASE ORDER For Resale SR AC 99-999999 123456 Number - Taxable Date -3/5/00 4000 Widgets $2.00 each $8000.00 Regulation 1668

18. CALIFORNIA SELLER’S PERMIT SR AC 99-999999 JOE SMITH JOE’S BA R 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 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 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

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

23. Recorded vs. Reported Taxable Sales • Comparison between taxable sales per your books and records and taxable sales reported to the Board.

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

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 800-400-7115 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. www.boe.ca.gov

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

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 Sales80,000 Cost of Goods Sold $20,000 Gross Profit$20,000/$80,000 = 25% Markup

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

32. 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

35. CONTRACTORS • Construction Contract • Types of Contractors • Contractors in general • United States Construction Contractor • Types of Contracts and Billings

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

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.

39. Services Available BOE Website -- www.boe.ca.gov • Library of BOE information • Links to other CA websites • On-line Verification of Seller’s Permit numbers Local Board Offices BOE Information Center • 1-800-400-7115/TDD 1-800-735-2929 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 -- 1-888-324-2798 • 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.

41. THANKYOU FOR COMING