California Sales Tax Problems Can Become Expensive Quickly

A CDTFA sales and use tax audit can place a significant financial burden on a California business. What begins as a request for records can develop into an assessment for additional tax, penalties, and years of accumulated interest.

If you have received an audit notice, information request, Notice of Determination, or other correspondence from the California Department of Tax and Fee Administration (CDTFA), you do not have to navigate the process alone.

I represent businesses and individuals in CDTFA sales and use tax audits and administrative appeals throughout California, with a particular focus on businesses in Bakersfield, Kern County, and the Central Valley.

My goal is straightforward: understand how the CDTFA arrived at its numbers, identify where the audit may be wrong, and build the strongest factual and legal case for reducing or eliminating the proposed liability.

CDTFA Sales & Use Tax Audit Representation

A sales tax audit is more than an accounting exercise. The methodology the CDTFA uses can have an enormous impact on the final assessment.

CDTFA auditors may examine:

• Sales tax returns
• Federal and state income tax returns
• Bank statements and deposits
• Credit card and merchant processor records
• Point-of-sale reports
• General ledgers
• Sales journals
• Purchase invoices
• Resale certificates
• Exemption certificates
• Inventory records
• Cash sales
• Vendor records
• Business records from third parties

When the records are incomplete or the CDTFA believes reported sales are unreliable, the auditor may use an indirect audit method to estimate taxable sales.

That is often where significant disputes arise.

An estimate based on bank deposits, credit card ratios, purchase markups, observation tests, or other sampling methods can produce a tax assessment substantially higher than the business's actual taxable sales.

An audit methodology is not necessarily correct simply because the CDTFA used it.

Challenging CDTFA Audit Methods

One of the most important parts of defending a sales tax audit is understanding exactly how the auditor calculated the alleged understatement.

I examine the CDTFA's audit schedules and supporting workpapers rather than simply accepting the bottom-line assessment.

Depending on the case, issues may include:

• Incorrectly treating nontaxable deposits as sales
• Including loans, transfers, or capital contributions in gross receipts
• Double-counting transactions
• Incorrect credit card ratios
• Improper markup calculations
• Unsupported estimates of cash sales
• Improper or unrepresentative test periods
• Failure to account for exempt transactions
• Disallowed resale transactions
• Problems involving resale certificates
• Incorrect treatment of sales shipped outside California
• Errors reconciling sales tax returns to income tax returns
• Incorrect application of local or district tax
• Statute of limitations issues
• Penalties that should not have been imposed
• Mathematical and computational errors

Sometimes the strongest defense comes from the business's own records. Other times, the key is demonstrating that the CDTFA's assumptions or sampling methodology do not accurately reflect how the business actually operated.

The objective is not simply to produce more documents. It is to determine which evidence matters and how it affects the audit computation.

Do Not Wait Until the Audit Is Finished

The best time to challenge a CDTFA audit is often before the assessment becomes final.

During the audit, there may be opportunities to provide additional documentation, explain unusual transactions, challenge assumptions, or establish that the auditor's proposed methodology does not accurately measure taxable sales.

Once the CDTFA issues a Notice of Determination, strict appeal deadlines begin to run.

If you disagree with the assessment, you generally have 30 days from the date the Notice of Determination was mailed to file a Petition for Redetermination.

Waiting can dramatically limit your options.

CDTFA Appeals and Petitions for Redetermination

Receiving a Notice of Determination does not necessarily mean the audit is over.

A taxpayer who disagrees with a CDTFA assessment may file a Petition for Redetermination challenging all or part of the liability.

The appeal should identify the amounts being disputed and, more importantly, explain the specific factual and legal grounds for reducing or eliminating the assessment.

I represent taxpayers throughout the CDTFA administrative appeals process, including:

• Petitions for Redetermination
• Requests for reaudit
• Appeals Bureau conferences
• Written legal and factual submissions
• Challenges to audit methodology
• Presentation of additional documentation
• Penalty disputes
• Settlement discussions
• Claims for refund
• Office of Tax Appeals matters when appropriate

An effective appeal should do more than state that the assessment is too high. It should explain why the CDTFA's determination is wrong and demonstrate what the correct result should be.

Reaudits and Audit Adjustments

A CDTFA appeal does not always require an all-or-nothing fight.

In many cases, the evidence supports specific adjustments to portions of the audit.

That may involve reconstructing transactions, tracing deposits, providing invoices, identifying transfers between accounts, substantiating resale transactions, correcting an audit schedule, or demonstrating that a particular test period produced distorted results.

Where appropriate, I work toward a reaudit or specific adjustment of the measure of tax rather than simply arguing in general terms that the assessment should be reduced.

The numbers matter. A successful CDTFA appeal often comes down to identifying exactly which audit items should change and showing why.

How I Handle a CDTFA Sales Tax Audit

When a business owner comes to me with a CDTFA audit, one of the first things I want to see is the auditor's work.

I do not assume the government's numbers are correct.

I want to know what records the auditor reviewed, what records may have been overlooked, what assumptions were made, how taxable sales were calculated, and whether the audit methodology makes sense for the particular business being examined.

I also understand that the person sitting across from me is usually not thinking about audit schedules and tax regulations. You are thinking about your business, your employees, your family, and what a six-figure tax assessment could do to everything you have spent years building.

That matters to me.

My approach is personal and hands-on. I handle the case myself. I review the records, communicate with the CDTFA, analyze the audit schedules, and develop the strategy for challenging the assessment.

I also try to explain the case in plain English.

If I think the CDTFA has a strong position on an issue, I will tell you. If I believe the auditor's methodology or conclusions can be successfully challenged, I will tell you that too.

My job is not to give you false hope. It is to figure out where we can legitimately attack the assessment and make the strongest case supported by the facts and the law.

Bakersfield & Kern County CDTFA Tax Attorney

Businesses in Bakersfield and throughout Kern County deal with sales tax issues across a wide range of industries, including restaurants, convenience stores, retailers, contractors, agricultural businesses, trucking and transportation companies, auto-related businesses, cannabis businesses, wholesalers, and other closely held companies.

I represent taxpayers in Bakersfield and throughout Kern County who are dealing with CDTFA audits, assessments, appeals, and other California sales and use tax disputes.

Having a local attorney also means you have someone you can actually meet with, bring records to, and speak with directly about what is happening with your business.

Whether the CDTFA has just opened an audit or has already issued an assessment, getting involved early can make a significant difference.

Common CDTFA Sales Tax Audit Problems

Unreported Sales

The CDTFA may conclude that reported taxable sales are too low based on bank deposits, credit card receipts, purchases, federal income tax returns, or other records.

The underlying data must be examined carefully. Not every deposit represents a taxable retail sale.

Cash Sales

Cash-intensive businesses frequently receive additional scrutiny. Auditors may attempt to estimate cash sales using ratios, markups, observation tests, or other indirect methods.

Those estimates can be challenged when the assumptions or sample periods do not accurately represent the business.

Resale Transactions

California generally does not impose sales tax on qualifying sales for resale, but the documentation supporting those transactions can become a major audit issue.

A missing or questioned resale certificate does not necessarily end the analysis. The underlying transaction and available evidence should be examined.

Bank Deposit Analysis

Deposits may include much more than taxable sales.

Transfers between accounts, loans, owner contributions, reimbursements, returned funds, and other nontaxable transactions can distort an audit if they are treated as business receipts without proper analysis.

Credit Card and Merchant Processor Records

Merchant processor data can be useful, but it must be interpreted correctly. Gross processor figures may not necessarily equal taxable sales and can include transactions that require adjustment or further investigation.

Penalties

A CDTFA assessment can include substantial penalties in addition to the underlying tax and interest.

Where the facts support it, I evaluate whether there is a basis to challenge or seek relief from the penalties asserted.

Already Received a Notice of Determination?

Do not ignore it.

A Petition for Redetermination generally must be filed within 30 days of the date the Notice of Determination was mailed. Missing that deadline can result in the assessment becoming final and may force you into a different and potentially more difficult procedure to continue challenging the liability.

If you have received a CDTFA Notice of Determination, contact a tax attorney promptly so the notice, assessment, audit schedules, and applicable deadlines can be reviewed.

Frequently Asked Questions

Can I challenge a CDTFA sales tax audit?

Yes. Proposed audit findings may be disputed during the examination, and a taxpayer who receives a Notice of Determination may generally challenge the assessment through a Petition for Redetermination.

How long do I have to appeal a CDTFA assessment?

For a typical Notice of Determination, the deadline to file a Petition for Redetermination is generally 30 days from the date the notice was mailed. Different procedures and deadlines can apply to certain notices, including jeopardy determinations.

Can the CDTFA estimate my sales?

Under certain circumstances, the CDTFA may use indirect methods to estimate taxable sales, particularly where it considers the business's records inadequate or unreliable. The resulting methodology and calculations can still be challenged.

What if my records are incomplete?

Incomplete records make an audit more difficult, but they do not necessarily mean the CDTFA's estimate is correct. Other records and third-party documentation may be available to reconstruct transactions or challenge assumptions used in the audit.

Can an attorney deal directly with the CDTFA for me?

Yes. Once properly authorized, I can communicate with CDTFA personnel on your behalf, review the audit, provide documentation, present arguments, and represent you through the administrative appeals process.

Should I hire a tax attorney before or after the audit?

Earlier is usually better. Resolving an issue while the audit is still open can sometimes prevent an incorrect position from becoming part of a formal assessment. If the audit has already concluded, however, there may still be substantial appeal rights available.

Talk to a Bakersfield CDTFA Tax Attorney

A CDTFA audit does not have to be accepted at face value.

If your business is under audit, you have received a Notice of Determination, or you believe the CDTFA has overstated your California sales or use tax liability, I can review the audit and help determine the best way to challenge it.

I represent businesses and individuals in Bakersfield, Kern County, and throughout California in CDTFA sales and use tax disputes.

Contact my office to discuss your CDTFA audit or appeal.