Caution-Sellers Beware

California Sales Tax can be very unfriendly!

You are traveling home from a long day at work, maybe even a long week of work. You suddenly hear sirens. You peer into your rear-view mirror and notice a police car with its lights and sirens blaring, indicating you need to pull to the side of the road. You acknowledge the request and slowly drive to the side of the road. You sit silently for a few seconds, pondering why this is happening to you because you are sure you were not speeding and that you were not violating any other rules of the road.

The police officer appears at your window and asks for your license and registration. You find your driver’s license, registration, and proof of insurance and provide these documents to the officer. You sheepishly but politely ask the officer why you were stopped. The officer explains you were stopped because they were unsure exactly how fast you were traveling, and you must now present “proof” that you were not speeding. You discuss the matter with the officer, insisting that you were traveling well within the posted speed limit, but you have no other proof to show this. The officer then issues you a ticket for driving eighty-five miles per hour since you did not prove you were only going the posted 65 miles per hour.

You continue to voice your disagreement and utter frustration with the situation, continually asking the officer how you can be presumed to have been speeding when he has no proof you were speeding. But, after further discussion, the officer hands you the ticket, asks you to sign it, and explains that by signing you do not accept guilt, but you do agree to appear in court to protest the ticket or to pay the statutory fine instead. The officer walks away without further explanation, and you are left dumbfounded in your car, wondering how this could happen. How could you be presumed guilty of speeding when the ticketing police officer has no proof you were speeding? Isn’t this America?

We hope the above scenario would not hold up in a court of law. However, a similar scenario involving California Sales and Use Tax would very likely hold up. One of the most misunderstood facts of the California Sales Tax Law is that the law presumes that all gross receipts are subject to sales tax until proven otherwise. Comparing the California sales tax scenario to the speeding ticket scenario, the California Sales and Use Tax Law would presume that you were speeding unless you could prove you were not speeding by presuming that all gross receipts are taxable until you prove the gross receipts are not taxable. Revenue and Taxation Code Section 6091 states:

“For the purpose of the proper administration of this part and to prevent evasion of the sales tax it shall be presumed that all gross receipts are subject to the tax until the contrary is established. The burden of proving that a sale of tangible personal property is not a sale at retail is upon the person who makes the sale unless he takes from the purchaser a certificate to the effect that the property is purchased for resale.”

Adding to the issue, California Revenue and Taxation Code Section 6051 establishes that the sales tax is imposed directly against the retailer and not the purchaser. Consequently, regardless of whether a person collects California sales tax reimbursement from their customer if the person cannot prove their sale was nontaxable, the sale will be treated as taxable, and the person making the sale, having now become a retailer, will be held responsible for payment of the sales tax, along with interest and possible penalties.

This discussion is only one example of the craziness that can arise when dealing with California Sales and Use Tax. However, this topic is so commonly misunderstood. It is so commonly the basis for many of the problems we see when dealing with sales tax audits and other issues created by the California Department of Tax and Fee Administration. We believe all businesses must remember the critical concept that the California Sales and Use Tax Law establishes that all gross receipts are presumed to be taxable sales until proven otherwise. These same businesses should also be diligent in ensuring that they properly support their gross receipts as being exempt from California Sales and Use Tax whenever they treat a transaction as nontaxable.

Because of the legal foundation of the California Sales and Use Tax Law, businesses would be wise to consider the following as one of their rules to live by: Seller Beware.

Related Posts

Contact Us