Sales and Use Tax audits by the California Tax and Fee Administration
Gregory Blake CPA, ABV
Many businesses, especially dentists and doctors, are seeing an increase in Sales and Use Tax audits by the California Tax and Fee Administration (CDTFA.) This is the result of Assembly Bill (AB) No. 147 (Stats. 2019, ch. 5) which requires out-of-state retailers with no physical presence in California to collect use tax, if during the preceding or current calendar year, the total combined sales of tangible personal property delivery to California by the retailer and all persons related to the retailer exceed $500,000.
We have helped many clients this year in navigating and completing these audits successfully. The auditor will ask for some initial financial and tax information that we provide. From this, the auditors audit and ask for further documentation to determine what purchases should have paid tax but did not. We are able to add value and make sure they do not include items that should not be taxed, for example, practice purchase assets.
One area of concern are lab costs. The CDTFA references regulation 1506(e) which states:
Dentists are consumers of the materials, supplies, dental laboratory products and other tangible personal property which they use in performing their services. Tax, accordingly, applies to the sale of the tangible personal property to them.
Dental laboratories are the retailers of the plates, inlays and other products which they manufacture for dentists or other consumers. Tax applies to their entire charges for such products regardless of whether a separate charge or billing is made for materials and manufacturing services.
What this means is that lab costs, although a service, are not exempt. However, the tangible items purchased to be implanted would be exempt. This is expanded in Regulation 1591 (b)(2):
(2) PERMANENTLY IMPLANTED ARTICLES. Articles permanently implanted in the human body to assist the functioning of, as distinguished from replacing all or any part of, any natural organ, artery, vein or limb and which remain or dissolve in the body qualify as medicines. In addition, articles permanently implanted in the human body to mark the location of a medical condition, such as breast tissue markers, qualify as medicines. An article is considered to be permanently implanted if its removal is not otherwise anticipated. Except for devices excluded from the definition of “medicines,” permanently implanted articles include the interdependent internal and external components that operate together as one device in and on the person in whom the device is implanted. Tax does not apply to the sale or use of articles permanently implanted in the human body to assist the functioning of any natural organ, artery, vein or limb or mark the location of a medical condition, and which remain or dissolve in the body when such articles are sold or furnished under one of the conditions provided in subdivision (d)(1) through (d)(6).
Permanently implanted articles include, but are not limited to, permanently implanted artificial bone screws and bone pins, dental implant systems including dental bone screws and abutments…
We have helped many clients this year successfully complete their audit and save money and make sure you don’t pay more than you should.
If you receive any notices about your practice being audited, or have more questions, please reach out to us today – we are glad to help.