California Sales Tax Audit Procedure

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GENERAL 0416.05
Some retailers, when accounting for total sales, record only the sales price of the merchandise
in the sales account and credit sales tax reimbursement to a reserve account. This procedure
contemplates a separation of the sales price from the sales tax on either sales tickets or cash
register readings. In any event, sales tax collected is not included in reported gross sales.
Other retail establishments such as markets, taverns, and restaurants often find that separation
of the sales price from tax reimbursement is not practical, and the entire amount charged the
customer is credited to sales. In the latter cases, the taxpayer is entitled to a deduction for sales
tax included in total sales provided it can be proved to the satisfaction of the board that they have
not absorbed the tax but have actually taken it into consideration in determining the total sales
price of the merchandise.

AUDITING PROCEDURE 0416.10
In cases where a sales tax accrual account is maintained, the clerical accuracy and propriety of the
amounts posted to that account should be verified. A sales tax accrual account showing credits
only slightly in excess of taxes paid, or payments in excess of collections, does not necessarily
indicate errors in reporting.
In reconciling the accrual account, the auditor should adjust for tax on the measure of cash
discounts, bad debts claimed, refunds of tax to customers who were charged in error and for
any other instances where the taxpayer did not debit the accrual account where such a charge
was in order. In addition, the auditor should adjust for such items as reported self-consumed
merchandise and any other sales reported on which the taxpayer did not accrue tax. If any excess
debit or credit of tax still exists, after making the above adjustments, it should be the taxpayer’s
responsibility to explain such excesses.
In cases where a deduction is claimed for sales tax included in reported gross sales, the auditor
should determine:
(a) That total amounts of sales tickets are entered in the sales journal.
(b) If sales tickets are not prepared, that sales tax is rung up on the cash register if it is added
to selling prices.
(c) That where sales tax is not added to sales prices, effect was given to the tax by the retailer
in determining the total sales prices.
Regulation 1700 establishes the presumption that the selling price includes tax
reimbursement if the taxpayer posts or provides the notices contained in Regulation
1700(a)(2)(C) 1 and 2. Failure by the taxpayer to satisfy these presumptions does not
preclude acceptance of other evidence to support the tax included deduction. Claimed
“tax included” deductions should be allowed unless there is sufficient evidence to rebut
the taxpayer’s claim. The mere failure to comply with the presumptions of Regulation
1700 is in itself insufficient proof that the retailer has not included the tax in the selling
price.
This deduction is computed after the balance of the audit is completed and is based on audited
sales (purchases subject to use tax not included) minus deductions. In order to avoid the allowance
of sales tax included on disallowed deductions on which sales tax was not charged, the audited
taxable sales (tax included) should be decreased by the amounts of such disallowed sales. Sales
tax included in taxable sales may then be computed by multiplying taxable sales (tax included)
by a factor

 

Factors for other current tax rates are:
Tax RateFactor
6.50% .061033
7.00% .065421
7.125% .066511
7.25% .067599
7.375% .068685
7.50% .069767
7.625% .070848
7.75% .071926
7.85% .072786
7.875% .073001
7.925% .073431
8.00% .074074
8.25% .076212
8.50% .078341
8.75% .080460
Sales tax included should be allowed in all audits where sales have been estimated if the basic
factors in the estimate include sales tax. For example, where prices which include sales tax are
used to develop a mark-up of purchases, the sales estimated by the mark-up method will have
the tax included.