What is the CDTFA?
The CDTFA stands for the California Department of Tax and Fee Administration. This agency was created in 2017 and took over the duties of sales and use tax administration from the Board of Equalization. Although a new agency was created, the sales tax laws went largely (if not entirely) unchanged (at least initially). Accordingly, the CDTFA is now responsible for collecting sales and use tax and otherwise enforcing the sales tax laws.
Common Issues with the CDTFA
Failure to File
Perhaps the most common mistake business owners run into in dealing with the CDTFA occurs when they fail to file a “sales and use tax return.” Sometimes this issue arises because the business owner does not realize they are accruing a sales tax liability.
Here is an example to explain:
George sells hot sandwiches from his food truck and doesn’t know these sales are subject to tax. As a result, George does not charge customers the tax and also does not budget for the additional tax expense. Two months go by and George is made aware that he owes tax on these sales but, he panics and does not file a return for the first quarter. As a result, the CDTFA starts contacting George asking for the return.
Like George, many taxpayers face this type of challenge when first starting a business. And believe me; the CDTFA does not make it easy to dig out of the hole. To put it bluntly, if a taxpayer is delinquent on sales tax payments, the CDTFA tries to collect as much as possible as fast as possible because they believe you are going out of business anyway. In other words, they want to make sure they get something while there is something to get. However, there are options available to taxpayers in this type of situation, which we will discuss later.
Failure to Pay
Another common scenario, which results in a tax bill with the CDTFA, occurs when a business owner collects sales tax but, instead of paying it over to the CDTFA, they use it to pay other bills. This happens to many businesses that are falling behind on bills.
Here is another example to explain:
Susie owns a car dealership and collects sales tax from her customers on each sale. During the first quarter, she has collected $20,000 in sales tax. However, she is running behind on paying the rent for her car lot. Accordingly, she decides to make the rent payment of $10,000 instead of remitting the taxes to the CDTFA, leaving her with a $10,000 tax bill.
Audit with Additional Tax Assessed
The final common circumstance that leads to a CDTFA tax bill occurs when a business is audited and assessed with additional tax. In California, it is not a matter of if you will be audited but when. Moreover, if you are audited and additional taxes are assessed, the CDTFA will check back with you within three years and conduct a mini audit to see if another audit is necessary. At the end of the day, most businesses that are assessed additional tax in an audit are not able to pay the tax debt off with a lump sum payment. This means they need to explore other alternatives, such as an offer in compromise (when available) or a payment plan.
How does the CDTFA collect from people that owe?
The CDTFA uses a variety of methods to collect from businesses and other taxpayers that have an outstanding tax liability. However, there is a process in place which requires certain steps be taken (sometimes referred to as taxpayer rights). Almost all action taken by the CDTFA is preceded by a notice in the mail.
The CDTFA is statutorily required to mail notices to taxpayers before they take certain action. The two main notices deal with enforced collections (levies, seizures, etc.) and suspending or revoking a sellers permit. In the case of a sellers permit, the CDTFA must set a hearing date before the permit can be revoked. At the hearing, the taxpayer can provide evidence why the permit should not be revoked. Usually, revocation is on the table when tax returns have not been filed. Therefore, it is important to make sure the returns are filed even if the taxpayer cannot pay the full balance owed (failure to pay can be a reason for revoking a permit but this is unusual).
Suspended or revoked sellers permit
Again, the CDTFA will give a 60 day notice of the intent to revoke/suspend a sellers permit. If the sellers permit is revoked and the taxpayer continues to make taxable sales they may be subject to a fine and imprisonment (up to one year). However, this can all be avoided by dealing with the CDTFA when the notices come through the mail (if a taxpayer is uncomfortable dealing with the government, it is recommended he/she hire an experience California sales tax attorney for representation).
“Enforced collections” is a term used when a tax agency is otherwise unable to gain voluntary compliance from a taxpayer. In other words, if a taxpayer ignores requests for payment, returns, or information, the CDTFA has various tools (powerful tools) at its disposal to force compliance.
The CDTFA has the authority to levy bank accounts if a taxpayer is unwilling to comply with certain requests or demands. That does not mean the CDTFA can do whatever it wants but it does have tremendous power to collect taxes owed. Accordingly, it is very important to understand where you are in the negotiations process to ensure you do not overstep your rights.
In certain cases, business owners that have been dually assessed for a prior businesses sales tax liability can receive a wage garnishment, which is issued to their new employer. Again, taxpayers have rights to avoid this and stop it once it happens. But, steps must be taken to enforce those rights.
Liens are not necessarily “enforced collections.” However, the CDTFA will quickly issue a lien if a balance goes unpaid and the taxpayer is unresponsive. A sales tax lien gets recorded in the county where the taxpayer lives and attaches to all property (real and personal). Although these liens tend not to hit personal credit reports anymore they are an obstacle to buying or selling real property.
Several years ago, the California Legislature passed a law that requires the CDTFA to make public a list of its 500 most delinquent taxpayers (that owe over $100,000). For taxpayers that make the list, they face a myriad of obstacles (business and otherwise) because potential business partners, lenders, investors, etc. now know there is a significant tax liability, which the taxpayer failed to address (through a payment plan or otherwise). Additionally, many licensed individuals face suspension if their name makes the list (attorneys, doctors, etc.). According to the CDTFA, many taxpayers earmarked for inclusion on the list come forward each year before the publication to sort out their issues.
What options are available to taxpayers that owe?
Offer in Compromise
Many taxpayers are eager to learn whether or not an offer in compromise (settlement) is available to resolve their tax issue. This is for good reason, as qualifying taxpayers can save tons of money under the right circumstances. As a general matter, certain types of sales tax debt will automatically disqualify a taxpayer from the offer in compromise program. Specifically, if the taxpayer collected sales tax from its customers and did not remit those payments to the CDTFA they will not generally qualify for an offer in compromise, whereas if the taxpayer was audited and assessed additional tax they may qualify.
Ultimately, there are various factors that go into whether an offer in compromise is the right solution. Of course, since it poses the greatest benefit it should always be analyzed first. Taxpayers should always consult with a California sales tax attorney to determine if an offer in compromise is possible.
Another option available to taxpayers with lingering sales tax debt is a payment plan (installment agreement). This type of resolution allows taxpayers to repay the tax debt over several months or even years, which is based on the amount owed and ability to pay. In my experience, the CDTFA will apply significant pressure on taxpayers to repay the sales tax debt within 3-6 months. However, in many cases this is not an option, particularly if the balance due is high.
When does it make sense to hire a California Sales Tax Attorney?
Aggressive Collections / Difficult Negotiations
As stated above, the CDTFA aggressively pursues all tax debts. Accordingly, if the collector is unwilling to properly account for your ability to pay it is time to seek out representation.
Here is an example to help explain:
John owns a retail store and owes the CDTFA $120,000. Based on John’s financials (income statement and balance sheet) John’s business is able to $2,000 a month towards the back tax debt. However, the CDTFA collector is requiring John to pay $20,000 a month in order to repay the debt within 6 months. John would be forced to close his business under the collector’s proposed payment plan. Accordingly, it is advisable at this point that John seek representation.
California is home to several tax agencies with significant power to collect back taxes. The CDTFA is one of those tax agencies. And importantly, the CDTFA has a reputation for being one of the most aggressive tax collectors in the state of California (which is saying a lot). However, if they are not following proper procedures, they can be held accountable. Businesses facing CDTFA sales tax issues should consider seeking representation from a California sales tax attorney, especially if they are having difficulty working with the assigned collector.
If you are having trouble resolving an issue with the CDTFA give us a call at 760-932-0042 for a free phone consultation. During the consultation we will help you understand your rights and let you know how we can help.