By Chris Micheli
On October 23, 2001, the California Franchise Tax Board (FTB) issued FTB Notice 2001-6, entitled “Manufacturers’ Investment Credit (MIC) Audit Policy Regarding Use of Board of Equalization (BOE) Sales and Use Tax Audit Results.”
Text of Notice
The following is the text of the short Notice:
“Advice and guidance have been requested with respect to the extent that the Franchise Tax Board staff will rely on Board of Equalization sales and use tax audits in connection with audits of the Manufacturers’ Investment Credit (MIC) conducted by Franchise Tax Board staff.
“Where the BOE has examined a taxpayer’s fixed assets in connection with a sales and use tax audit for the same year in which a MIC is claimed, and the taxpayer can establish that the assets upon which the MIC is claimed are included within the scope of the BOE audit, Franchise Tax Board staff will accept the audit determinations for the payment of both sales and use tax. As a result, a taxpayer who has undergone a BOE audit described above will be treated as having satisfied the MIC requirement that sales or use tax be paid directly or indirectly on qualified MIC assets included in the BOE audit.
“Taxpayers are cautioned, however, that even though the BOE audit may satisfy the requirement that sales or use tax be paid for purposes of claiming the MIC, taxpayers must retain the invoices or other documentation concerning the acquisition or construction of the fixed assets included in the scope of the BOE audit for examination by Franchise Tax Board audit staff. The taxpayer has the burden to establish that the assets upon which the MIC was claimed were included within the scope of the BOE sales and use tax audit. In addition, fixed asset invoices and other documentation are also relevant to determine whether other statutory requirements for determining the appropriate amount of the MIC have been met. As with all other credits, taxpayers must retain the substantiating documentation throughout the appropriate statute of limitations period for examining the return upon which the MIC was claimed.
“The principal author of this notice is Geoff Way of the Franchise Tax Board, Legal Branch. For further information regarding this ruling, contact Mr. Way at the FTB, Legal Branch, P.O. Box 1720, Rancho Cordova, CA 95741-1720, or (916) 845-6351.”
Comments
This Notice is an interesting turn of events concerning MIC audits, as this has been a sore subject among taxpayers and practitioners who have sought a change in FTB guidance on this issue. Up to this point, the FTB has been auditing the same records already audited by the SBE on their sales tax audits. While the FTB was accepting use tax audit results, they had not always accepted sales tax audit results.
Taxpayers were of the opinion that, if there had been a sales tax audit and no adjustments were made, then the FTB should not be able to come in and audit the same records for the same tax year. Prior to issuing this notice, the FTB revisited the impact of the SBE audits and determined a change in audit policy.
This issue arises in the context of the second requirement to claim the MIC (i.e., “qualified costs”). You must be a qualified taxpayer and purchase qualified property. In addition, in order to qualify for the MIC, sales or use tax must be paid, directly or indirectly, on the qualified property, and the costs must be properly chargeable to the taxpayer’s capital account.
Prior to the issuance of this Notice, the formal audit position from the FTB was that SBE audits were valid for use tax purposes only, but not for sales tax purposes. If independent verification of sales or use tax payment was required (such as, because the SBE audit was for different years, the taxpayer is not a "retailer" under California sales tax law, etc.), the FTB would conduct sampling where appropriate to verify whether payment of the sales or use tax had been made.
It is important for taxpayers to keep in mind the requirements of this Notice: First, the taxpayer must establish that the assets upon which the MIC is claimed are included within the scope of the BOE audit. Second, the taxpayer must retain the invoices or other documentation concerning the acquisition or construction of the fixed assets included in the scope of the BOE audit for examination by the FTB.
Chris Micheli is an attorney and registered lobbyist for the Sacramento governmental relations firm of Carpenter Snodgrass & Associates (916) 447-2251) or cmicheli@carpentersnodgrass.com.