The Director of the California Department of Tax and Fee Administration (CDTFA) issued a memo on June 19, 2023, stating that the CDTFA will not “issue, use, enforce, or attempt to enforce” its changes to the sales and use tax statistical sampling rules alleged to be underground regulations by a private citizen who filed a petition with the Office of Administrative Law. The CDTFA stated that the amendments will not be enforced until they are adopted pursuant to the Administrative Procedure Act. The CDTFA published the changes to its statistical sampling rules contained in the CDTFA Business Tax and Fee Division Audit Manual, Chapters 4 and 13, and made them effective April 1, 2023.
The biggest change the CDTFA made to these rules was the elimination of the “three-error rule,” previously used by auditors for the last few decades. During sampling of data, auditors would not include errors in samples until the error rate exceeded three errors. This allowed for a small margin of error as an expected occurrence during an audit. The elimination of this allowance causes a much higher and misleading error rate of compliance.
For audits currently in progress, the old rules would have still been followed. If sample items had not been pulled yet in an audit in progress, the new procedures could have been elected if preferred. In addition to the elimination of the three-error rule, the new rules required the use of a minimum sample size of 300 items or 10% of the stratum population’s count, whichever is less, in statistical samples.
Although two interested party meetings produced an outpouring of negative input from tax professionals, including the California Taxpayers Association, the CDTFA still published the anti-taxpayer changes, which would have produced greater contention over errors and an increase in appeals and administrative costs.
While the memo issued by the director in June states that the CDTFA will hold off on the changes to the sampling rules, this is not the end of it. The CDTFA has simply retreated to regroup and force this through using the proper procedures/channels. The memorandum states that they “will not issue, use, enforce, or attempt to enforce…until the amendments are adopted…or an appropriate APA exemption has been identified.”
Ryan’s tax professionals will continue to monitor these proposed amendments and are here to assist with the new rules, if or when they are adopted. Please reach out to the Ryan professionals below for assistance with audit sampling issues in California and any other state.
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