California: Failure to Report Taxable Sales Leads to Penalty
- Oct 22, 2012 | Will Frei
The California State Board of Equalization (BOE) ruled earlier this year that an interior decorator must pay a negligence penalty for underreporting taxable sales between April 1, 2005 and March 31, 2008.
The case is a simple one. As outlined in the Hearing Summary by the BOE, an audit by the Sales and Use Tax Department (Department) revealed that the designer (petitioner) had recorded taxable sales of $4,517,772 but had reported taxable sales of $1,722,621. This leaves $2,795,151 in unreported taxable sales.
In addition, the petitioner incorrectly reported some taxable sales based on delivery date. The sales should have been reported based on the date the full payment was made, not on the date of delivery. $34,455 in sales was not reported because of this.
The total understatement of taxable sales in this case is $2,829,606. The petitioner does not dispute the deficiency, but claims a failure "to maintain adequate books and records" as the cause. The petitioner says it "prepared its returns following the guidelines set forth in the Board's Interior Design Pamphlet, and did not deliberately disregard its duty to keep adequate records in that the documents withheld form the Department pertained to jobs marked incomplete at the time of the Department's request." (Hearing Summary)
The hearing summary points out that the petitioner has been in the business for more than 30 years and has plenty of experience filing sales and use tax returns. Furthermore, the petitioner has been audited once before, when it was assessed a negligence penalty for underreporting taxable sales. This time around the BOE found a 164.26 percent error rate. According to the hearing summary,
"We conclude petitioner's continuation of the same error from the prior audit constitutes negligence. We also find that the 164.26 error rate in reporting sales is egregious and is strong evidence of negligence."
As a result, the petitioner is liable for a negligence penalty of $21,929.47 on top of redetermined taxes of $219,294.52. The total tax, interest, and penalty amount to $356.483.95.
In other words, it pays to pay more attention when reporting taxable sales in California.