California Tracks Taxpayer Noncompliance

In addition to overseeing the collection and distribution of tax revenue, the State Board of Equalization monitors compliance. Each year, it tracks taxpayer noncompliance--which businesses make the most errors, and which areas of sales and use tax law trigger the most noncompliance--and makes that information public. In recent years, representatives from the California BOE have gone door-to-door, verifying that businesses are paying the right taxes.

Top of the list

In FY 2010-11, "Failure to pay use tax on purchases from out-of-state vendors" topped the list. According to the BOE, this "accounted for nearly 29 percent of all net sales and use tax audit deficiencies (less refunds)." That translates into $122 million of lost tax revenue. One in six California taxpayers failed to pay use tax on purchases from out-of-state vendors.

Second on the list was "Unsupported sales for resale." It accounted for $76 million in unpaid tax, and "18% of all net sales and use tax audit deficiencies (less refunds)." Close to one in eight taxpayers were found to be guilty of this.

Failure to comply with sales and use tax law can lead to steep fines and penalties and, in some cases, legal prosecution. It's also uncivic, but that's beside the point. The bottom line is that the California BOE wants businesses to "report neither more nor less tax than required." To that end, it has published "Avoiding Common Sales and Use Tax Problems."

Common types of noncompliance

The most common types of taxpayer noncompliance in California are:

• Untaxed purchases from out-of-state vendors.
• Withdrawal from resale inventory for own use.
• Unsupported sales for resale.
• Difference between recorded and reported taxable sales.
• Reported sales lower than expected sales based upon a markup on purchase.
• Errors in compiling return.
• Difference between tax accrued and tax paid.
• Inadequate records resulted in unreported sales.
• Unsupported sales in interstate commerce delivered to instate customer.

Noncompliance occurs in all types of businesses, from mom-and-pop convenience stores to public utility companies. The BOE published a list of the top ten businesses making errors in FY 2010-11:

1. Public utilities, transportation and allied services (12.95%).
2. Publishers and distributors of light industrial equipment (11.35%).
3. Manufacturers and wholesalers of store and office equipment (8.19%).
4. Eating and drinking places with general on-sale licenses (6.78%).
5. Construction contractors and sellers of building materials (5.40%).
6. Gasoline stations (4.91%).
7. Eating and drinking places without alcoholic beverages (4.76%).
8. Producers, manufacturers, and wholesalers of petroleum products and related equipment (3.93%).
9. Manufacturers and wholesalers of electronic equipment (3.87%).
10. Full-time specialty stores (3.67%).

All other businesses accounted for 34.20% of taxpayer noncompliance.

Taxpayer noncompliance is not considered intentional; taxpayers intend to comply with tax law but fail to pay certain taxes either through ignorance or error. Intentional or not, fines and penalties apply.

When taxpayer noncompliance is intentional, it is tax evasion. Criminal charges may apply in addition to fines and penalties.

Is your business is compliant? Are you sure?

You can worry about it, or you can let someone else take care of sales and use tax for you.

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