California—Sales & Use Tax: Hotel Owners Entitled to Refund

California: Boutique hotel owners (taxpayers) were eligible for refunds of penalties imposed by the City and County of San Francisco for failing to file tax returns on time and failing to pay certain hotel taxes because they demonstrated that they had exercised reasonable care. The taxpayers relied on an employee to file, repay and make the payments, only to find out later that the employee never filed the returns or paid the taxes. Generally, a waiver of specific penalties is granted when the failure to make timely payment or report of tax liability occurred, despite the exercise of ordinary care by the taxpayer. However, the City believed that reliance on the employee did not constitute ordinary courtesy under applicable law and that taxpayers, even if they were entitled to recover some penalties due to their employee’s dishonesty, are subject to other provisions governing reimbursement of penalties.

Upon review, the Court of Appeal found that the taxpayers had successfully demonstrated that they exercised due diligence in connection with the filing and payment of taxes because they had hired, through a management company, a qualified person to be responsible for paying taxes. This employee presented the taxpayers with false financial statements and made it appear as if they had paid the taxes. In addition, the City’s argument regarding the disputed penalties was dismissed because the City erroneously imposed penalties when calculating the taxes owed. Instead, the applicable penalty is based on the actual tax due. As a result, taxpayers were entitled to a refund of the fines.


About Davis Davis & Harmon LLC – Sales Tax Experts: Headquartered in Dallas, Texas, Davis Davis & Harmon LLC – Sales Tax Experts specializes in sales/use tax refund recovery and audit defense. Our team of consultants is comprised of former Big 4 sales tax consultants and state sales tax auditors. Each of our consultants has 15 to 20 years of experience, providing our clients with access to a highly specialized team of sales/use tax professionals. At Davis Davis & Harmon, LLC, we are committed to maintaining the highest standards in our talent pool. We work hard to meet our clients’ needs by ensuring that you view our firm as an extension of your company and a member of your team.

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