Education is the Key to Solving our Budget Problems

By Edward C. Streichman

Education is the key to more accurate reporting of sales tax by retailers.

Under the State Board of Equalization's (Board) current policies, many retailers are uninformed about the agency's Sales and Use Tax laws and regulations, which are applicable to their business and industry.

During the last five fiscal years ending 6/30/09, the Board's field audit staff has conducted a total of 34,042 audit investigations. More than seven out of ten of those audit investigations have yielded errors made by retailers. More alarming is the fact that most of the audit investigations (61.37%) have disclosed deficiency determinations, i.e., the taxpayer owes additional tax, interest and penalties to the state. These types of reporting errors have existed for more than twenty years.

If we project these errors to the total number of seller's permits maintained by the Board during fiscal year ending 6/30/08, approximately 610,772 retailers may have made similar mistakes in reporting sales and use taxes on their returns. And the average net tax owed by them, which combines tax deficiencies and refunds, was equal to $43,498 per retailer during this period.

Is this what California taxpayers deserve or want? The obvious answer is no!Now is the time for the Board to more effectively manage its Sales and Use Tax program. The Sales and Use Tax program relies on voluntary compliance, and if retailers don't understand the law, the above-mentioned errors will continue to exist.

Why do these significant tax reporting problems exist?
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1. Sales and use tax laws are not widely known by most tax preparers. Many types of tax professionals such as CPAs, Tax Attorneys, Public Accountants, Enrolled Agents, accountants, bookkeepers, etc. are knowledgeable about income tax laws, but they are virtually uninformed of the sales and use tax codes. Consequently, errors in reporting occur on a routine basis.

2. The Board does not use any systematic and standardized methods for providing directives, which are pertinent to the retailer's industry or business code. The adequacy and completeness of laws, regulations, and publications issued to retailers needs improvement.

3. The Board emphasizes speed with processing new seller's permits. This occurrence has likely been caused by the dwindling staffs that are now employed in the district and branch offices throughout the state. During the last ten years, many field positions have been transferred to Sacramento headquarters so there are fewer technicians located in the field.

4. The Board permits taxpayers to register by mail. Therefore, taxpayers sometimes have very little contact with Board staff to discuss the correct application of the agency's various directives. Mail by registration may be a quick way to process new seller's permits, but taxpayers are left being unaware of crucial laws and regulations related to their business and industry.

5. A small percentage of understatements in taxable sales is related to tax evasion.

How will Streichman fix this problem?
----------------------------------------------------------- Retailers obtaining seller's permits should have a basic understanding of the Sales and Use Tax laws and regulations. Sales and Use Tax laws are much easier to understand than income tax laws since most types of industries are governed by a relatively small set of rules and guidelines.

The following steps should be implemented to improve reporting by retailers.

1. Discontinue use of the registration by mail program, and abandon any proposed electronic registration program via the internet. Face-to-face contact with taxpayers is the best method for obtaining accurate information.

2. Simplify the complexity of the Board's laws, which are frequently misunderstood by retailers, by including decision tables and/or flowcharts into its regulations.

3. Set up standardized guidelines for field office technicians, which specify which laws, regulations, pamphlets, etc. should be given to the retailer. This should be an integral part of the permit registration process.

4. Increase the number of tax technicians by transferring positions from headquarters to the field offices. This procedure will improve customer service to taxpayers and it can be accomplished through the process of attrition related to employee retirements and resignations.

5. Implement a procedure, which tests retailers on their knowledge of the sales laws and regulations pertinent to their business and industry. The DMV expects you to know the rules of the road prior to issuing you a driver's license, and likewise, retailers should know the sales tax rules prior to obtaining their seller's permit. This is only a one-time inconvenience that will greatly benefit the financial strength of the State and the well being of retailers by knowing what transactions are subject to tax.

How will retailers and California benefit from these changes?
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1. Retailers will better take advantage of applicable credits and deductions due to them. As a result, they will remit less tax on Sales and Use Tax returns and keep more income for themselves to operate their businesses.

2. Retailers will owe less tax when they are audited by the State Board of Equalization. Fewer mistakes will have been made by them because of their increased knowledge on how to correctly apply the Board's laws and regulations.

3. More accurate tax reporting by retailers means that California will have better funding for education, public safety, transportation, housing, health services, social services, and natural resource management. This will be accomplished without any increase in the sales tax rate.

4. California consumers will be more confident that the Sales and Use Taxes paid by them are correct, and that the Board's laws and regulations are uniformly applied to all citizens.

Everybody wins with more accurate tax reporting!