liability properly. Generally, the sales tax is the liability of the seller, whereas the use tax is the liability of the purchaser. A retailer who consumes merchandise purchased for resale under a valid resale certificate or any person who consumes merchandise purchased from a retailer, the sale of which is exempt from sales tax, is liable for the use tax on the cost of the property purchased. In the latter case, the purchaser’s liability is not extinguished unless they have paid the tax to the State, or to a vendor who is authorized or required to collect the use tax and has issued a receipt to the purchaser.
If a purchaser certifies in writing to a seller that the property purchased will be used in a manner or for a purpose entitling the seller to regard the gross receipts from the sale as exempt from the sales tax and uses the property in some other manner or for some other purpose, the purchaser shall be liable for payment of sales tax as if the purchaser were a retailer making a retail sale of the property at the time of such use and the sales price of the property to the purchaser shall be deemed the gross receipts from such retail sale.
Many consumers neglect to report taxable purchases because a satisfactory method of accumulating these purchases is not used. The auditor should be particularly vigilant in examining purchase orders, purchase invoices, requisitions and journal entries as well as general ledger accounts labeled “Research and Development” and “Promotional” for evidence of use tax. See section 0409.75 for a discussion of the audit procedures to be used for drop shipment transactions.
METHODS OF VERIFICATION
0408.10
Based on the type of business and the condition of the records, there are three general procedures used in establishing purchases subject to use tax:
• Examination of purchase invoices, requisitions, journal entries and inventory credits • Examination of debits to selected general ledger accounts and tracing the entries back to
the purchase invoices or other documents of original entry
• In some businesses such as small bars and small grocery stores, a reasonable estimate may be used.
AUDITS OF SALES SUBJECT TO USE TAX
0408.12
In determining the party liable for the assessment of use tax, the auditor should not presume the use tax will be assessed in the future audit of a purchaser due to the size of the entity or audit history, and may assess use tax against the seller. To avoid a duplicate assessment of use tax on the same transaction, the auditor should complete Form BOE-1164, Memorandum of Possible Tax Liability, and make a notation whether use tax was assessed on the seller/purchaser. The auditor sends a copy of the form to both taxpayer files. In addition, the auditor may preclude the duplicate assessment of use tax by using Form BOE 503-C (paper version) or Form BOE-503-C1 (electronic version), Statement of Property Purchased Without Payment of California Use Tax. Generally, in a simultaneous audit of the seller and purchaser, the use tax is assessed in the audit of the purchaser. However, the auditor should verify tax is not being assessed in the audit of the seller to avoid double taxation of the transaction. The auditor should adhere to the guidelines outlined in AM section 1302.25 when the transaction relates to a statistical sample.
January 2000
EXAMINATION OF PURCHASE INVOICES
0408.15
Invoices for a representative period, depending on the volume, should be examined and compared with the purchase record to determine that all invoices are on hand. Either all purchases that are considered taxable should be scheduled, or if details of reported amounts are available, the purchases should be traced to the taxpayer’s working papers and only the omitted items need be scheduled. A copy of the schedule should then be submitted to the taxpayer for verification. The taxpayer may be able to prove that the questioned items were not subject to the tax or were reported in another quarter. If the results of the test prove the taxpayer is reporting all items correctly, this phase of the examination should be discontinued. If, however, the test indicates improper reporting the test may be expanded, possibly to cover the entire audit period.
After having examined several months’ invoices, the auditor should be familiar with the names of vendors who supply the taxpayer with resale merchandise only or those vendors who consistently charge tax on consumable items as well as those vendors who do not charge tax on consumable items. Thereafter, the examination of invoices can be limited to those issued by vendors in the latter category. Frequently the “miscellaneous” file for each letter of an alphabetic file is a source of purchases subject to use tax.
An examination of purchases for capital expenditures should be made in detail only as the transactions are generally few in number with a relatively high unit value. Furthermore, such purchases usually are not made at regular intervals or in consistent amounts.
Wherever possible, estimate purchases of supplies, expendable tools, etc. based on a test period. This is particularly true in types of businesses where the consumable supplies bear a direct relationship to units produced or sold, e.g., coke used in the cupola process for producing steel, advertising material used in sales promotion, grease used in lube jobs, etc.
The monthly amounts of merchandise so consumed can be determined by an examination of several months’ purchase invoices. When this method is used, the taxpayer should be consulted and approval secured, if possible. (See Chapters 8 and 9 for discussions regarding purchases subject to use tax in restaurants and grocery stores, respectively.)
In instances where a voucher number system is used for accounts payable and filed in numerical order by years, it will be necessary to control any test, beyond either spot checking or a complete year’s examination of invoices, working from the voucher register to the invoices. A dollar volume test as described under section 0405.20 might be used here if it is not practical to make a test from the voucher register. Invoices filed alphabetically by years may be examined (short of spot tests or complete review) by working from the distribution thereof in the purchase journal or check register. That is, specific expense account distributions may be reviewed or tested back from the book of original entry to the invoices. Here, again, as suggested in the foregoing a dollar volume test might be developed.