Proprietors of liquor stores that sell beer and wine are frequently audited by the CDTFA for sales and use tax violations. In general, liquor stores, like gas stations, are cash-intensive retail businesses that are obligated to collect sales and use taxes on many items, but not all. As a result of the CDTFA’s mistrust of cash-intensive businesses (that, in the CDTFA’s eyes, more easily facilitates tax underreporting) and the complicated sales and use tax obligations liquor stores face, the CDTFA frequently audits liquor stores that face significant California tax liability.
Taxable vs. Nontaxable Sales
California liquor stores must operate their retail business in accord with California’s complicated sales tax regulations. At base, certain items are subject to sales tax while others are not. The rules for which items are subject to California tax can lead well-meaning operators to inadvertently incur significant tax liability following a CDTFA audit.
Taxable Sales
• Alcoholic beverages
• Books and Magazines
• Soft drinks
• Certain hot prepared food products
• Ice
• Newspapers
• Nonprescription medicines
• Other nonfood or beverage items such as automotive supplies, propane, greeting cards, etc.
• Tobacco products
Nontaxable Sales
• Candy
• Chips
• Cold meats
• Cold sandwiches
• Dips
• Ice cream
• Milk
• Noncarbonated, nonalcoholic beverages such as water, juice, vitamin water, cocktail mixes (sold in liquid or frozen form), and coffee
• Produce
Removing Sales & Falsifying Records
As of 2014, it is a crime for anyone to knowingly sell, purchase, install, transfer or possess software or devices that are used to hide or remove sales and to falsify records. Accordingly, the use of these devices not only leads to significant civil tax liability, but also criminal liability resulting in up to 3 years in jail, fines up to $10,000, and repayment of illegally withheld taxes, including penalties and interest.
Legal Consultation
Liquor store owners and operators should consult a tax attorney after receiving notice of a CDTFA audit. After the initial contact with the CDTFA auditor, the liquor store owner/operator can designate a tax attorney as their authorized representative. As the authorized representative the tax attorney can represent the liquor store owner throughout the sales tax audit and, if necessary, appeal the notice of determination.
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