California State Board of Equalization Adopts Preponderance of Evidence Standard for Sales Tax Audits, Reports McClellan Davis

On August 13, 2013, the California State Board of Equalization (SBOE) formally acknowledged that its sales tax auditors must apply a “preponderance of evidence” standard when evaluating evidence provided by taxpayers. This level of proof is the same as required under California civil law and will be clearly articulated in the state’s audit manual.

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McClellan Davis, LLC
Sales and Use Tax Consultants

McClellan Davis, LLC Sales and Use Tax Consultants

One important, if little known, legal precept is that a presumption under the law is not considered evidence pursuant to the California Evidence Code. Therefore, any legally recognized evidence, that’s relevant and credible will trump a legal presumption.

Sacramento, CA (PRWEB) September 26, 2013

On August 13, 2013, the California State Board of Equalization (SBOE) formally acknowledged that its sales tax auditors must apply a “preponderance of evidence” standard when evaluating evidence provided by taxpayers. This level of proof is the same as required under California civil law and will be clearly articulated in the state’s audit manual.

California’s sales and use tax law presumes that all sales are taxable unless there’s evidence to support an exemption. Once it’s determined that there is such evidence, the law will uphold the exemption if a preponderance of the evidence supports the taxpayer’s position.

The “preponderance” standard applies to any factual issue that’s in dispute. It means that if there’s evidence available, and more than 50% of it supports a particular assertion of the facts, that factual assertion will be accepted as true. In other words, whenever the evidence indicates that it’s more likely than not that a given fact pattern is correct, that fact pattern should be accepted by the taxing authority.

After years of fighting with the SBOE on a case-by-case basis, Jesse McClellan, Esq., of McClellan Davis LLC (a Sacramento based sales and use tax consulting firm) initiated a successful effort through the Taxpayers’ Rights Advocate office to establish written guidelines that reflect the letter and intent of the law.

“Although the underlying laws have been in effect for decades, they haven’t been articulated in any of the SBOE’s policy statements or within the agency’s audit manual,” attorney McClellan explained. “As a result, they’ve gone virtually unnoticed by the audit staff. Auditors and their supervisors generally demand evidence that goes far beyond the “preponderance” standard, often requiring clear and convincing evidence or even proof that establishes a taxpayer’s position beyond a reasonable doubt.” (Both the “clear and convincing” and the “beyond a reasonable doubt” standards require much higher levels of proof.)

“One important, if little known, legal precept is that a presumption under the law is not considered evidence pursuant to the California Evidence Code. Therefore, any legally recognized evidence, that’s relevant and credible, will trump a legal presumption,” McClellan continued. “An auditor can’t (or isn’t supposed to) assert tax under the presumption of taxability once credible evidence is presented, if at least 51% of that evidence (the preponderance) indicates the tax doesn’t apply.”

According to Dan Davis, CPA, of McClellan Davis LLC, “In recent years the Board’s treatment of evidence provided by taxpayers has gotten worse. Auditors have often disregarded such evidence in favor of a presumption of taxability, even though the presumption no longer applies once credible evidence to the contrary becomes available. If the evidence is actually considered, it is often dismissed as insufficient if it ‘merely’ indicates that the taxpayer’s assertions are more likely than not to be correct.”

Taxpayers and auditors alike can now refer to the new written guidelines, which are published in section 101.22 of the SBOE’s Audit manual on the agency’s website. The guidelines specifically state that the preponderance of evidence standard applies to all sales and use tax audits that don’t involve fraud.

ABOUT MCCLELLAN AND DAVIS, LLC: McClellan Davis, LLC is a Sacramento, California based company that provides sales and use tax consultation and representation to merchants and CPAs nationwide. Since 1980, McClellan Davis and its predecessor entity have represented thousands of clients, from sole proprietors to multinational corporations, including virtually every type of business that is subject to sales or use tax. For more information on McClellan Davis, LLC, please call (916) 737-5637 or visit http://www.usa-salestax.com.


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