California sales tax: Interest, penalties, and fees

TL;DR

• Not complying with sales tax obligations will lead to interests, penalties, and fees.
• Operating your business without a permit will lead to a 50% penalty, besides legal consequences if ignored further.
• Misusing a resale certificate will lead to a charge of misdemeanor, a fine (between $1000 and $5000), or imprisonment of up to one year, besides interest charges and penalties.
• Delayed filing will lead to interest charges and a 10% penalty, which could lead to higher charges if ignored further.
• Late prepayments that are done before the return's due date will lead to a penalty of 6%, but further delay would cause a 10% penalty, with interest charges.
• Failing to pay the collected tax amount will bring in a 40% penalty (not applicable if the average tax is below $1,000 per month or less than 5% of the total tax due).
• If you're supposed to make payments by Electronic Funds Transfer (EFT) and pay by check or debit/credit card instead, 10% of the tax amount will apply as penalty.
• Failing to pay taxes for more than 90 days after receiving a notice with a liability crossing $250 will lead to a Cost Recovery Fee (CRF).
• You can opt for relief from a penalty and/or CRF, if an event beyond your control occurs, like an unforeseen death or a natural disaster.

Failing to comply with California sales tax rules and regulations can lead to interest charges, penalties, and fees for your organization. While some fees are levied only in the final step of your sales tax obligation—when filing and paying sales tax—interest charges and penalties can apply anytime your organization isn't compliant with CA sales tax laws.

Interest charges are calculated based on the duration and the tax amount. Let's say a payment to be made in September is made during the second week of October instead. Your organization would owe the original tax amount plus the interest built up during the month of September and the two weeks of October. Penalties, meanwhile, are similar to fines, and can be both legal and financial in nature. For instance, you may have to pay a certain percentage of the tax amount you owe as a penalty for failing to meet your tax obligations duly.

As a seller and taxpayer, knowing about the legal and financial consequences in every step of the sales tax process will help you with prompt compliance and a better understanding of what you may be charged with, if you fail to do so.

Under the California sales tax rules, there are multiple interest charges and penalties that can apply, with some exceptions. In most cases, they will apply if you:

• Continue business without a seller's permit
• Misuse a resale or exemption certificate
• Fail to calculate sales tax accurately and pay the wrong amount
• Fail to remit the collected tax amount to the CDTFA
• Fail to report tax on a taxable transaction while filing returns
• Fail to file a return or file a late return
• Fail to pay the full amount on the return or fail to pay by the due date

Charges for these can happen at any stage of the CA sales tax process: registration, collection, filing, or payment. This guide will explain these charges in more depth and let you know what to look out for as a California seller with a sales tax obligation.    

Sales tax registration

Permits

If you don't possess a permit by the tax return's due date, there will be a penalty of 50% of the tax amount during the period you carried on business without a permit. This penalty will be in addition to a 10% penalty that applies if you fail to file returns by the due date. 

Note: The CDTFA has specifically mentioned that retail florists selling without a permit will face a $500 penalty, in addition to any other penalty.

The 50% penalty is not applicable if:

• The average sales tax amount is less than $1,000 per month 
• Vehicles, vessels, and aircraft that have been registered outside California to evade paying tax are already charged with a penalty. In this case, there will be no 50% penalty on the sale of vehicles, vessels, and aircraft

Moreover, if you fail to obtain a permit after receiving these penalties, you may face legal consequences like criminal citations or have to appear in court. Failing to do so could land you in prison, and if a citation is issued, a fine of up to $5,000 with additional penalties may apply, based on the court's discretion.

Sales tax collection

Misuse of certificates
When you begin to collect tax, it's important to note what is taxable and who to collect tax from. For instance, you may purchase goods for resale, and you will have to show a resale certificate to prove that you don't have to pay tax. However, if you are aware that you're using a resale certificate to use the product for personal purposes instead of resale, and use this certificate to evade taxes, you will be charged for a misdemeanor under the Revenue and Taxation Code, section 7153.

Fine

As a result of the charge above, a fine of an amount between $1,000 and $5,000 will be levied, or imprisonment of up to one year, or both. 

Penalties
If a resale certificate is misused, a penalty of $500 (for each transaction made with the misused certificate) or 10% of the tax amount will apply, whichever is higher. Along with this, if you don't report and pay use tax for using the goods bought in this manner, you may be liable for an added 10% penalty (for negligence) or 25% penalty (for fraud).

Interest

Interest for the misuse of a resale certificate will have to be paid along with the tax amount owed. If you have used the goods for personal reasons, you will be liable to pay interest on all the months that you owed tax and failed to pay. So the later the payment, the higher the interest charges.

How to calculate interest

Interest can be calculated by multiplying the tax amount with the monthly interest rate mentioned on the bottom of your return. Interest is not compounded.

If you don't pay the interest amount by the due date (usually the same due date for filing returns and paying the tax amount), the CDTFA will calculate the interest and send you a bill. If you pay your taxes online, both the interest and penalty charges will be automatically calculated. Interest charges are calculated in the same way through all the steps of sales tax compliance, unless specified otherwise.

Sales tax filing and payment

When it comes to filing your taxes and making payments, there are different scenarios under which you would be liable to pay interest and penalties.

Late filing and payment

If you file your returns after the due date, you will have to pay a late tax filing penalty of 10% of the tax amount due, plus interest. In the case of multiple penalties, the charge will not exceed 10% unless specified.

Failure to file
If you fail to file your returns, a Notice of Determination (bill) will be issued to you by the CDTFA mentioning the tax amount that you owe. This will be stated along with any associated interest charges and a penalty of 10% of the tax amount, unless you file a timely appeal. However, interest charges will continue to add onto the original tax amount, regardless of whether the appeal is filed. Meanwhile, if you still don't make the payment, a Notice of Redetermination will be sent to you, the due date for which is 30 days from its issue date. If this due date is surpassed, a penalty of 10% will apply to the tax amount.

Keep in mind that if you intentionally refuse to file your returns or commit fraud, you will be charged with an additional penalty of 25% and may also face criminal charges.

For late prepayments

If you are required to make prepayments and fail to do so by the due date, you will have to face penalties and interest charges. You will have two due dates—prepayment due dates and due dates for the return. If you make a prepayment after the prepayment due date, but before the due date for the return, there will be a penalty of 6%.

However, if you intentionally continue to delay the payment, a penalty of 10% will apply and a notice will be sent to you with the option to dispute this penalty with a petition for redetermination, where you can request that this charge be reviewed and changed.

Interest for late prepayments

Interest charges will also be applied to late prepayments, even if you have been relieved from your prepayment penalty of 6%. As usual, interest is charged monthly, and the amount is calculated from the day after the prepayment's due date.

Failure to pay

If you don't pay the collected tax amount, a penalty of 40% will be levied. However, this penalty is not applicable if:

• You have an average unreported tax that is less than $1,000 per month or less than 5% of the total tax due 
• You are unable to pay due to circumstances beyond your control, and if the situation is assessed and approved by the CDTFA. In such a case, an extension will be granted and the tax amount has to be paid by the due date, with interest. These interest charges can be waived if the reason is owed to a public disaster.

Method of payment

Penalties can apply if you pay using the wrong method. If you are instructed by the CDTFA to pay via Electronic Funds Transfer (EFT), you will be charged with a 10% penalty of the tax amount if you pay by check or credit/debit card instead.

Collection Cost Recovery Fee

If you do not pay your due tax and fee liabilities (including interests and penalties), you will receive a notice by the CDTFA. If you fail to make the payment for more than 90 days after the notice has been sent, and if the amount of your liabilities exceeds $250, a Cost Recovery Fee (CRF) will be collected.

The CRF amount will be determined by the CDTFA. The CDTFA website has stated that a liability amount of $250.01 to $2,000.00 will lead to a fee of $190, while a liability amount of $2,000.01 to $50,000.00 will lead to a fee of $570. Any greater liability amount will lead to a fee of $950. If you cannot pay the entire tax amount, you can avoid paying this fee by enrolling in a payment plan within 90 days of the bill date and by fulfilling all the terms of agreement. This can be accessed by going to the CDTFA website and clicking on Online Services >> Payment Plan.

Note: After December 15, 2020, if you have less than $5 million in annual taxable sales, you can can use an interest-free payment plan for 12 months for a sales tax liability of up to $50,000. However, if you don't want to pay interest, you must make the full payment by April 30, 2022.

When can relief be granted?

If there is a valid reason, you can be granted relief from a penalty and/or CRF. This is granted in the event of something happening beyond your control, like an unforeseen death or a natural disaster, and can be opted for if you:

• Cannot file returns or pay taxes on time
• Cannot make a payment by EFT (for those required to pay via EFT)
• Received a penalty wrongfully, when timely payment was made

To do this, you can choose the 'Request relief' option in the website. In such a case, a 'Declaration of timely mailing' must be submitted, and your payment records have to be shown as proof. Similarly, an extension for delayed filing can be provided if you give a valid reason, and you may be asked for supporting proof at that time as well. 

Furthermore, if you are faced with multiple penalties but are charged 10%, then the reason for each penalty to be waived must be given, and only then will you be given relief.

To avoid these consequences, it's crucial to follow through with your sales tax compliance duly and promptly. Zoho Books is an online accounting solution that can help you focus on your business, ease your tax burden, and stay tax compliant with easy sales tax management. Learn more about Zoho Books.