Home > California CPA Magazine > November 2008 Issue > CA Tax: Sales Tax Audits; Independent Contractor Case

CA Tax: Sales Tax Audits; Independent Contractor Case

California CPA magazine: November 2008

By Leonard W. Williams, CPA
Since the taxes on Schedule A of an individual income tax return aren’t a deduction in computing AMT income on IRS Form 6151, the rule-of-thumb has been, for clients who are in the AMT, that it doesn’t pay to pre-pay those taxes.

An important point about prepaying state and property taxes I gleaned from continuing education materials: Contrary to conventional wisdom that pre-paying state taxes produces no benefit when one is subject to the AMT, it seems that there can be a benefit for taxpayers with extraordinary gains.

The method involves offsetting other income to allow the lower 0 percent capital gain rate for 2008 to kick in. So, CPAs should continue to project it both ways, with and without pre-paying California income tax, to find out which is the best move.

Save Taxes by Electing Out of the Installment Method for State Taxes

This tactic is laid out in greater detail in Spidell’s California Tax Letter (Aug. 8, Page 87). The gist is that if a non-California resident has a rental in California, he or she must file California Form 540-NR annually, and the sale will be reported on the California income tax return for the year of sale.

However, California allows a taxpayer to make a different election for California purposes to report the sale if the taxpayer was subject to California taxes in the year of the sale. If reporting via the installment method is available, it might result in lower total taxes going out the door if the taxpayer elects the installment sale method for federal purposes, but elects out of the installment sale for California purposes.

A Good Guy Won

Many years ago, a CalCPA member asked the lender, on a property that he’d bought, for a copy of the appraisal, but was met with a refusal.
He then pointed out to the lender that the loan required him to insure the building and improvements only, and that his personal estimate was that $1,000 would cover that. He received a copy of the appraisal.

Sales Tax Audits

According to news reports, the California Board of Equalization is expanding its sales tax inspections of business premises.

The BOE customarily has made unannounced visits in one of two ways. First, they commonly have gone into the premises of businesses unannounced, watched to see that sales are rung up, sales taxes charged and observed the volume of transactions, etc. These visits most commonly have focused on restaurants, bars and gas stations.

They also have done sweeps of high-volume taxpayers, such as souvenir shops on Fisherman’s Wharf in San Francisco. These are usually, although not always, done by the BOE equivalent of an IRS special agent.

Employees of any business should be instructed to tell anyone from any taxing agency that, to the best of their knowledge, taxes are being collected as required. However, only the appropriate person in the business is authorized to discuss details beyond that.

The appropriate person may or may not be available, but the seller’s permit and business license should be available and visible at all times.

An Independent Contractor?

When a hiring company let an independent contractor go, the individual sued, claiming he was actually an employee. He lost the case and the appeal. This is unusual, since the courts generally find in favor of the individual in such cases.

The difference here was that the parties conducted themselves pursuant to their agreement. “When all the factors are considered and weighed, we can conclude only that the parties entered into an independent contractor agreement and conducted themselves accordingly” (Varisco v. Gateway Science and Engineering, Inc., Sept. 15, 2008, Second District, Div. Five, 2008 SOS 5526.)

The Court of Appeals précis read, in part, as follows: “Where defendant entered into a contract with plaintiff, and sent plaintiff to a job site to perform work, but retained no control over plaintiff’s manner or means of accomplishing assigned task, plaintiff engaged in skilled work, supplied his own tools and equipment and received no benefits from defendant, a single clause in letter of agreement which allowed either plaintiff or defendant to terminate relationship at will did not transform parties’ relationship into an employment relationship.”

Thanks to the following CPAs for their assistance in compiling this information: Jim Counts, Sharon Kreider, Bob Petersen and Ralph Weintraub.  
Leonard W. Williams, CPA is a Sunnyvale-based sole practitioner. A member of CalCPA’s Committee on Taxation, the AICPA Tax Division and a former Peninsula Chapter president, you can reach him at williams@lwwilliamscpa.com.