How CDTFA Sales Tax Assessments Are Calculated – A Guide for California Business Owners

If you’re a California business owner, receiving a notice from the California Department of Tax and Fee Administration (CDTFA) can feel like a punch to the gut. Sales tax audits are stressful enough, but when the CDTFA issues a sales tax assessment, the stakes are even higher. These assessments can add up to tens of thousands of dollars in back taxes, interest, and CDTFA penalties that can quickly spiral out of control.

The problem? Many business owners don’t understand how CDTFA actually calculates these assessments. Without that knowledge, it’s almost impossible to know if the state’s numbers are correct — or inflated.

In this post, we’ll break down how CDTFA sales tax assessments are calculated, what methods auditors use, why assessments often overstate liability, and how you can fight back with effective California sales tax audit defense strategies.

WHAT IS A CDTFA SALES TAX ASSESSMENT?

A sales tax assessment is the CDTFA’s official calculation of how much sales tax it believes your business owes. It’s the end result of an audit or review, and it becomes legally enforceable once issued.

• If you don’t respond or appeal, the CDTFA can use this assessment to:
• File a lien against your business or personal assets
• Seize bank accounts or receivables
• Levy property or garnish wages
• Refer your case to collections or the Attorney General
  
  

In other words, the assessment is the CDTFA’s way of turning assumptions into debt. Business owners who don’t fight back are often left failing a CDTFA audit without ever realizing they had options.

THE CORE METHODS CDTFA USES TO CALCULATE ASSESSMENTS

CDTFA auditors rely on several different methods to estimate taxable sales. The method they choose depends on your industry, the records you provide, and whether they suspect underreporting.

Here are the most common:

1. Markup Method

CDTFA reviews your purchase invoices and applies an average markup percentage to estimate sales.

Example: If your liquor store buys a case of beer for $20 and auditors apply a 40% markup, they’ll assume you sold it for $28 — whether that reflects reality or not.

Often based on industry averages, not your actual pricing.

👉 Related post: CDTFA markup audits

2. Observation and Test Period Method

Auditors may observe your business for a short period (a week or month) and then project that data across multiple years.

Example: A restaurant is observed to sell $25,000 worth of food in July. CDTFA extrapolates that the restaurant sells $300,000 per year.

Highly risky if the test period was unusually busy (e.g., summer tourist season).

3. Bank Deposit Method

CDTFA reviews deposits into your business accounts and assumes they are gross sales.

Adjustments may or may not be made for non-sales deposits (like loans or transfers).

This often overstates taxable sales unless carefully reconciled.

4. Third-Party Data Method

Auditors use data from suppliers, wholesalers, or credit card companies to estimate your sales.

Example: If your supplier reports $500,000 in product sales to you, CDTFA assumes all were resold and taxable.

Dangerous if you offer exempt products, promotions, or waste/loss.

5. Sampling & Projection

CDTFA takes a sample of your records (e.g., three months) and projects results over the entire audit period.

Common when your records are incomplete.

Even small errors in the sample period can magnify into six-figure assessments.

WHY CDTFA ASSESSMENTS ARE OFTEN INFLATED

Many California businesses discover that their CDTFA assessment is much higher than what they believe they owe. Common reasons include:

Use of industry averages instead of your actual data

Failure to account for exempt sales (e.g., groceries, resale items)

Ignoring waste, spoilage, or theft

Overcounting based on bank deposits

Projecting from a busy season to the entire year

Applying penalties of up to 25% for “negligence”

This is why blindly accepting an assessment is dangerous. Unless you challenge the CDTFA’s assumptions, their inflated numbers become law.

HOW TO CHALLENGE A CDTFA ASSESSMENT

1. Request Detailed Workpapers – You have the right to see exactly how the auditor calculated the assessment.

2. Provide Accurate Records – Invoices, inventory reconciliations, and exemption certificates can help overturn CDTFA assumptions.

3. File a Timely Petition – You usually have 30 days from the Notice of Determination to appeal.

4. Use the Taxpayer Rights Advocate – For cases of unfair treatment or unreasonable assessments.

5. Hire a Professional – An experienced CPA can reconstruct records, negotiate adjustments, and appeal errors.

👉 Related post: CDTFA audit appeal

THE ROLE OF BOULANGER CPA IN CDTFA DEFENSE

At Boulanger CPA and Consulting PC, we represent businesses across Orange County facing CDTFA audits and assessments.

We analyze CDTFA’s calculations for errors

Rebuild financial data when records are incomplete

Negotiate with auditors to reduce assessments

Represent clients in hearings and appeals

If your business has been hit with a CDTFA sales tax assessment, don’t wait. The clock is ticking, and proactive defense can mean the difference between survival and closure.

📞 Call us today at 657-218-5700 or email marc@boulangercpa.com to schedule a confidential consultation.

CONCLUSION

CDTFA sales tax assessments aren’t always accurate — but once issued, they can devastate a business. By understanding how these assessments are calculated, you can spot inflated numbers, protect your rights, and defend your business.

Orange County business owners don’t have to face the CDTFA alone. With the right strategy and representation, you can fight back and protect what you’ve worked so hard to build.