California Disallows Taxpayer’s Claimed Credit for Overpayment Made in Previous Period

This case is strong WARNING to taxpayers the fail to file amended returns based on tax adjustments or errors on a prior period return.  An out-of-state taxpayer was properly disallowed self-help credits that it claimed on California sales and use tax returns for amounts overpaid in the previous quarter since no statute permits the taxpayer to grant itself refunds. The taxpayer believed that it had inadvertently over-reported California sales tax on a return. Instead of filing an amended return or filing a claim for refund to substantiate the potential overpayment, the taxpayer reduced its reported taxable measure by the same aggregate amount in subsequent sales and use tax returns, which is referred to as a self-help credit. Under audit, the California Department of Tax and Fee Administration (CDTFA) had disallowed the claimed self-help credit and assessed a deficiency based on the underreporting of tax liability. The taxpayer raised numerous equitable arguments regarding the denial of the self-help credit. The CDTFA may refund any amount, penalty, or interest that has been paid more than once or that has been erroneously or illegally collected or computed. In order to obtain a refund of an overpayment, a taxpayer must file a timely claim for refund. The taxpayer did not file a timely, written claim for refund as required. A self-help credit fails to put the CDTFA on notice of any alleged overpayment and, in effect, allows a taxpayer to grant its own claim for refund. There is no statute permitting a taxpayer to grant itself a refund. As such, the taxpayer’s claimed self-help credits were properly disallowed. Taxpayers should review all prior returns to determine if they had made self-help credit adjustments and file appropriate amended returns or refund claims before the statute of limitations closes. (M.A.C. Cosmetics, Inc., California Office of Tax Appeals, No. 19014177, April 3, 2020, released August 2020)

Posted on August 28, 2020