MEDIA RESOURCE: Tax Evasion
The taxes and fees collected by the California State Board of Equalization (BOE) fund vital state and local services such as police and fire departments, schools, hospitals and roads. This is why tax evasion poses such a serious threat to the state's economy.
Tax evasion can take a number of forms, such as intentionally underreporting the full tax liability due, failing to pay sales taxes, making sales without a valid seller's permit, selling untaxed tobacco products, blending taxable fuel with untaxed fuel, and purchasing products from out of state for use in California without paying use tax.
To more effectively address large-scale tax evasion, the BOE often collaborates with federal, state, and local law enforcement agencies charged with enforcing tax, license, and labor laws to investigate, prosecute and recover tax revenues. These investigations have resulted in criminal citations, seizure of contraband, grand jury indictments, felony convictions, fines, and millions of dollars in court-ordered restitution, among others.
How can citizens report suspected tax evaders?
There are several ways to file a tax evasion complaint.
- You may call our Tax Evasion Hotline at 1-888-334-3300.
- You may call our Investigations Division at 916-324-0105.
- You may fax your complaint to us at 916-324-1578.
- You may e-mail us anonymously online: File a Tax Complaint
- You may write to us at:
State Board of Equalization
PO Box 942879 MIC: 42
Sacramento, Ca. 94279-0042
"Underground Economy" is a term that refers to those individuals and businesses that deal in cash and/or use other schemes to conceal their activities, identities and true tax liability from government licensing, regulatory, and taxing agencies.
The State of California loses billions of dollars to the underground economy. Fraud and tax evasion most often occur in cash-driven businesses such as bars, restaurants, used car dealerships, and construction, but is also common in businesses selling counterfeit products and in the tobacco industry
Tax evasion hurts California's economy as legitimate businesses are confronted with unfair competition, funding for public resources are lost, and employees are forced to work in conditions without basic protections or even lose their jobs.
Visit our Tax Recovery and Criminal Enforcement (TRaCE) website to learn more about the Underground Economy and what is being done to combat it. The TRaCE Task Force was established in 2014 to combat organized elements of the underground economy engaged in the manufacture, importation, distribution, and sale of pirated intellectual property, and other economic crimes resulting in the evasion of business, payroll and/or income taxes. Collectively, the Task Force investigates, prosecutes and recovers revenues lost to the underground economy.
Cigarette and tobacco product tax evasion continues to be a significant problem. The federal cigarette tax rate increase in 2009 from $0.39 to $1.01 per package of cigarettes increased the profit margin for selling "untaxed" cigarettes and tobacco products, making it more alluring for individuals to commit tax fraud.
Individuals evading cigarette and tobacco product taxes can significantly undercut their competition by selling products without paying the proper taxes. This allows them to charge significantly less, and thereby gain a greater market share over the legitimate business operator.
California vendors of tobacco products who are not licensed and/or do not report, assess, or pay the cigarette and tobacco products excise taxes are in violation of the Cigarette and Tobacco Tax Laws and the Cigarette and Tobacco Products Licensing Act of 2003 (AB71).
The BOE estimated that in fiscal year 2012-13, cigarettes sold without payment of the excise taxes were equal to 16% of the legitimate sales made. In fiscal year 2005-06, that figure was 18%. Although an uphill battle, the BOE has worked to combat cigarette and tobacco tax evasion by sponsoring legislation (SB 1701, Statute 2002) that required counterfeit-resistant tax stamps on each pack of cigarettes, and through "boots-on-the-ground" enforcement.
In Fiscal Year 2013-14, BOE Investigators:
- Conducted 10,539 inspections
- Issued 246 civil or criminal citations for cigarette and tobacco product tax violations
- Executed 221 seizures of contraband cigarette and tobacco products
The following are some of the signs of cigarettes being sold without proper payment of excise taxes:
- Unstamped cigarette packages; every pack of cigarettes sold in California must have a California tax stamp on it
- Cigarettes labeled "U.S. Tax Exempt for Use Outside U.S.," or similar language
- Cigarettes being sold for significantly lower prices than those in other stores, or even out of the trunk of someone's car
- Seller of cigarettes does not have a BOE Cigarette and Tobacco Products License displayed in public view
- Packs of cigarettes without the U.S. Surgeon General's health warning
Common signs of tobacco products tax evasion:
- Tobacco products such as cigars and chewing tobacco being sold for significantly lower prices than those in nearby stores.
- A sale of tobacco products where a significant discount is offered for cash and no receipt given.
- No receipt given when tobacco products are purchased
- Seller of tobacco products does not have BOE Cigarette and Tobacco Products License displayed in public view
Click here to view the current cigarette and tobacco products tax rates.
The retail sale of tangible personal property in California is subject to sales tax and is the responsibility of the seller (retailer) to report and pay the tax. Sales tax evasion involves failure to report all sales and pay taxes due on those sales.
Examples of sales tax evasion:
- Failing to report and pay total tax liability on all taxable sales
- Intentionally underreporting total taxable sales
- Selling merchandise without a seller's permit
- Collecting sales tax but not paying it to the state
- Using impromptu venues to avoid detection – roadside stands, door-to-door sales, unregistered swap meets
- Using sales suppression software to erase sales and falsely report a lower tax liability
Zappers (sales suppression software):
A "zapper" is an illegal software installed on a cash register to erase sales from the business records, with the intent to defeat or evade the determination of an amount due, in this case, sales tax. It is illegal to knowingly install, sell, transfer, purchase or possess zappers, or any other sales suppression software that falsifies reported sales in California as of January 1, 2014 – BOE-sponsored AB 781 (Bocanegra).
Common signs of sales tax evasion include:
- Sellers who brag about not reporting sales to the government
- Sellers who do not issue receipts
- Sellers who do not ring up purchases on a cash register, especially in a retail store setting
- Sellers whose prices seem unusually low
Any person who fails to report, assess, or pay fuel taxes that would otherwise be due may be guilty of fuel tax evasion.
Examples of fuel tax evasion:
- Using dyed (untaxed) diesel fuel in a vehicle operated on California highways without being licensed to remit the tax.
- Intentionally importing fuel from outside the state without remitting the appropriate California state fuel taxes.
- Blending taxable fuel with an untaxed product to increase volume without paying tax on the increase.
Common signs of fuel tax evasion include:
- Numerous fuel spills at a location where unlawful blending may take place.
- Fuel deliveries taking place when a service station is not open – late at night or early in the morning.
- Deliveries by vehicles other than fuel tanker trucks or by tanker trucks with out-of-state license plates.
- Service stations that are selling fuel at significantly lower prices than competitors.
- Dyed (red) diesel fuel spilled at a highway accident scene.
- Invest in the Real Deal!
- Arresting the Underground Economy (poster)
- Don't Buy Into California's Underground Economy
- Combating California's Underground Economy
- TRaCE Task Force