A CDTFA sales tax audit is a review by the California Department of Tax and Fee Administration of whether a business reported and paid the correct sales and use tax. For small businesses, the audit usually focuses on taxable sales, exempt and resale transactions, and purchases where use tax was owed but not paid.
Who conducts sales tax audits in California
Sales and use tax used to be administered by the Board of Equalization. Since 2017, the CDTFA has handled that work, including audits. The FTB is a separate agency that deals with income tax, so a business can face a CDTFA review and an FTB or IRS matter at the same time, each with its own rules and deadlines.
If you have received an audit contact letter from the CDTFA, call (415) 754-0115 to schedule your free consultation, or use our contact page, so you understand the scope before the first meeting.
How a CDTFA sales tax audit unfolds
The contact letter and audit period
The audit typically begins with a letter or call from an auditor identifying the periods under review and asking to schedule a meeting. The CDTFA generally has three years from the return's due date or filing date, whichever is later, to issue a determination. That period can be longer, up to eight years, when no return was filed, and there is no limit in cases of fraud. Auditors sometimes ask the business to sign a waiver extending the period, which deserves the same careful thought as any statute extension.
The records auditors request
- Sales journals, point-of-sale reports and cash register records.
- Sales invoices, especially for sales claimed as exempt or for resale.
- Resale certificates from customers who bought for resale.
- Purchase invoices and the general ledger, used to test whether use tax was owed.
- Federal income tax returns and bank statements, which are often compared with reported sales.
How auditors measure what was owed
Auditors rarely review every transaction. They choose a method suited to the business and the records available.
Test periods and sampling
An auditor may examine a test period, such as a few months or a quarter, and project the error rate across the full audit period. If the test period is unusual, for example a holiday season or a slow month, the projection can distort the result. Questioning whether a sample is representative is a legitimate part of the process.
Markup and other indirect methods
Where records are incomplete, auditors may use indirect methods. A markup analysis compares the cost of goods purchased with the sales prices charged to estimate what taxable sales should have been. Restaurants and retailers may also see observation tests, where the auditor watches transactions over a period of time.
Resale certificates and exempt sales
Sales for resale are not taxable only if the seller took a valid resale certificate in good faith. Missing or incomplete certificates can lead an auditor to treat those sales as taxable. Gathering proper documentation from customers during the audit can sometimes resolve those items.
Audit findings and the appeal path
At the end of the audit, the auditor explains the findings and provides a report. If you disagree, discuss it at the exit conference and with the auditor's supervisor; additional documentation sometimes changes the result before anything is issued. The CDTFA then issues a Notice of Determination for any amount it says is due.
- Petition for redetermination. Generally due within 30 days of the Notice of Determination. Missing it usually makes the determination final.
- Appeals conference. The petition is reviewed within the CDTFA, usually with an appeals conference where you present your position and records.
- Office of Tax Appeals. If the CDTFA decision still goes against you, the case can generally be appealed to the independent California Office of Tax Appeals.
Throughout the appeal, keep paying attention to current-period returns. Correcting the reporting practices identified in the audit helps prevent the same issue from appearing in the next review, and it shows good faith if penalties are being contested.
Owners should know that California law can make certain responsible people personally liable for unpaid sales tax of a business that has closed, under specific conditions. That makes audit results relevant even after a business winds down. Our article on closing a business with debt in California touches on these concerns.
How our firm helps with sales tax audits
The Somal Law Firm represents small businesses in tax audits and appeals throughout Pleasanton, Dublin, Livermore, San Ramon, Danville and the wider East Bay. Attorney Bob Somal can review the audit scope, help organize records, raise questions about sampling and methodology, and handle the petition and appeals conference if needed. When a sales tax balance is part of a larger financial picture, the firm can also discuss options for small business tax debt. Read more about our tax law services.
Frequently asked questions
How long does a CDTFA sales tax audit take?
It depends on the size of the business, the quality of the records, and the issues found. Audits with complete, organized records tend to move faster, while those involving sampling disputes or missing records can take considerably longer.
Can the CDTFA audit a business that has closed?
Yes, within the applicable time limits. Closing the business does not end responsibility for sales tax owed during the periods it operated.
What is use tax, and why does it come up in audits?
Use tax generally applies to items bought without California sales tax, such as from some out-of-state sellers, and used in the business. Auditors review purchase records to see whether it was reported.
Do I need to sign a waiver of the audit time limit?
You are not required to, but declining may lead the CDTFA to issue a determination based on the information it already has. An attorney can review whether signing makes sense for your situation.
A sales tax audit is easier to manage with a plan from the start. Call (415) 754-0115 to schedule your free consultation with The Somal Law Firm, or reach us through the contact page. Bring the audit letter and any schedules the auditor has shared, and we will explain how the process works for your business.
Attorney Advertising. This article is general legal information for Bay Area residents, not legal advice, and does not create an attorney–client relationship. Every situation is different — please consult a licensed attorney about your specific circumstances.