(A) Plan to catch unregistered companies adds 22.5% finders fee penalty
California, under a new program, has contracted with a private company, MTB to identify unregistered out of state companies doing business in the California.

Companies that are targeted are retailers that are deemed to be doing business in the state and are required to collect Use Tax. The search will be limited to companies that clearly have Nexus in California such as leasing companies that rent tangible property in the state and construction contractors installing in the state. Also, major industrial, technical and heavy equipment manufacturers and distributors are likely potential targets.

In addition to owing the tax, interest, and 10% failure to file penalty for the past eight years, an additional 22.5% penalty will be assessed. The authority for this is found in Revenue and Taxation Code Section 6830. This extra penalty will be paid to MTB (MTB is a company formerly known as the municipal tax bureau).

The first letters of inquiry (approximately 1200 thru 9-30-98) were sent out in July. MTB also contracts with New Jersey, Massachusetts and Oklahoma. It will be interesting how this pans out but it is clear the state is aggressively seeking out of state businesses to collect California Use Tax.

(B) Managed Audits
Senate Bill 1104, (Statutes of 1997) authorized the Board to initiate a managed audit program. The general concept of a managed audit is to allow taxpayers to perform much of the work and scheduling necessary to complete a field audit and determine a liability. Taxpayers eligible for the managed audit program include those which meet all of the following criteria:

those which are not required to make prepayments of tax;

those which report a single or small number of clearly defined

taxable issues;

those which have few or no exemptions;

those which agree to participate in the program; and,

those who have the resources to comply with the managed audit instructions provided by the Board.

Advantages of a managed audit to a taxpayer include:

increased accuracy of future tax reporting through a better understanding of the tax laws;

decreased disruption of the business operations from reduced auditor presence;

establishment of an on-going, cooperative relationship with the Board;

reduction in the number of audits subject to administrative appeals and litigation.

The managed audit program will not change the Board's normal audit selection program. Audits will continue to be selected utilizing current selection procedures. After an account has been selected and assigned, the auditor will determine whether it qualifies for a managed audit. If it is illegible for the managed audit program, a written proposal will be made to the taxpayer. If the proposal is accepted by the taxpayer, the Board will identify prior to the taxpayer starting the managed audit, the audit period, the types of transactions to be covered, the specific procedures to be followed in determining a liability, the records to be reviewed, the manner in which the transactions are to be reviewed and schedules, a time period for completing the managed audit, and the time period for payment of liabilities and interest.

In return for performing the required work within the time frame specified by the Board, taxpayers will be subject to only one-half the rate of interest for any tax liability disclosed by the audit. If a taxpayer declines to perform a managed audit, a routine field audit will be performed by the auditor.

Currently, there has been only one such audit statewide. Upper management will begin educating districts on procedures relative to these managed audits in December.