Watch Out for Tax Traps!


Missing Records

tax records

You should retain business records for eight years. When business owners do not keep accurate records, government auditors may estimate a tax liability. Challenging such estimates is difficult without proper records.

If you hold a California seller's permit, the Board of Equalization (BOE) requires you to maintain business records for four years and to provide these records to the BOE when requested (see Sales and Use Tax Regulation 1698, Records). The Franchise Tax Board (FTB) suggests keeping business records on file for up to 12 years.

To learn more about record requirements see Publication 116, Sales and Use Tax Records.

For more information about the BOE audit process see Publication 76, Audits.

Successor Liability

man and woman shaking hands

If you are buying a business or stock of goods, you may become responsible for the seller's unpaid tax, interest, and penalties up to the purchase price of the business or stock of goods. This is called “successor liability” (see Sales and Use Tax Regulation 1702). To protect yourself from successor liability, you should request a certificate of tax clearance from the BOE before buying a business.

To request a tax clearance, contact your local BOE office or call the Customer Service Center at 1-800-400-7115.

To learn more about buying or selling a business Buying, Selling, or Discontinuing a Business.

For more information see Publication 73, Your California Seller's Permit and Publication 74, Closing Out Your Seller's Permit.

Insufficient Payments

The tax money you collect from your customers is meant to pay your sales and use tax obligation. The BOE recommends you deposit the money in a separate account. This will help ensure you have the funds necessary to make full, timely payments. The BOE can hold “responsible persons,” which could include business owners, employees, and others involved in the operation of a business, personally liable for any unpaid sales tax and use obligation.

Contact my office if you receive a bill indicating you are being held personally liable for a debt or have questions about this issue.

Underreporting of Tax

calculator and forms

If you are unsure whether sales or use tax is owed on your sales or purchases you can ask the BOE for written advice on your specific tax questions. Having an advice letter from the BOE may protect you from owing tax, interest, or penalties (see Sales and Use Tax Regulation 1705). Such protection is not provided for advice given verbally, in person, or on the telephone.

You may request written advice using our online request form or send a letter to one of our field offices.

For more information about getting tax advice in writing see Get It in Writing!

Spousal liability

Because California is classified as a community property state, your spouse (or domestic partner) may be liable for unpaid taxes, interest, and penalties even if he or she knows little to nothing about your business.

However, California law recognizes that in some cases it may not be reasonable or fair to require a spouse to pay this liability. Taxpayers may request relief as an innocent spouse if the basic requirements are met (see Sales and Use Tax Regulation 1705.1).

To learn more about innocent spouse relief see Publication 57, Innocent Spouse Relief.