FTB focus on OIC: plus, sales taxes on food and software.

CalCPA member Jim Counts recently attended a meeting of the State Bar Tax Procedure Committee with Kurt Arico, manager of the Franchise Tax Board's Offer in Compromise program.

Any CPA or attorney with OIC issues should contact Arico, who's aiming to make the FTB's OIC program more workable. You can contact him at: Kurt Arico; manager, SCCU, Specialized Collection Section MS A454; P.O. Box 1468; Sacramento, CA; 95812-1268; or phone, [phone]; or [e-mail].

At the meeting, Arico mentioned that forms for the OIC program--including Form 4905 PIT for personal income tax and Form 4905 BCT for business entities--can be obtained from www.ftb.ca.gov.

Other interesting facts gleaned from the meeting:

* 360 offers were accepted last year;

* 40 percent of the offers cover accounts that were previously deemed uncollectible;

* Average offer is 21 percent of the tax liability;

* 85 percent of the offers' funds came from sources beyond the taxpayer, such as gifts from relatives or friends, or a loan from someone; and

* Average time to collect the offers is seven years.

You can contact the OIC program unit at [phone] or www.ftb.ca.gov/individuals/bills/OIC.html.

Live-and-Learn Department

A TaxTalk participant asked, regarding appealing a proposed FTB assessment, whether the Hearing Officer may raise new issues.

The answer is yes. Just as with the IRS, new issues may be raised at any point in the administrative process.

Sales Taxes: A Whole Other World From Income Taxes

A newspaper reporter's inquiry regarding the Board of Equalization was recently posted on the TaxTalk listserve. The reporter asked about the propriety of the BOE statistically sampling a takeout food business to see how much is consumed on-site, and hence subject to sales tax. The answer is that the BOE may do so.

In response, a participant posted the following war story which illustrates why CPAs must keep abreast of their clients' activities.

The owners of a small take-out deli were exempt from sales taxes because there is no sales tax on food that can't be consumed on the premises.

Without consulting their CPA, the deli owners put several small tables in front of the deli so customers could go outside, sit down and eat. They still didn't collect sales taxes because they "were only selling food for take-out." When the CPA found out, he told them that they should be collecting sales taxes. The deli owners were slow to implement this change.

It wasn't long until a State Board of Equalization auditor happened to buy something at the deli and noticed that sales tax wasn't being collected. The auditor initiated an audit and the owners got stuck for sales taxes for food consumed at the tables for the entire time that they had the tables out front.

Of course, the deli owners blamed their CPA and fired him.

Sales Taxes and Software

Bob Petersen, CPA, posted the following general summary regarding the sales tax aspects of software sales.

The California sales tax law recognizes two classes of software: canned and custom.

Canned software is designed for multiple users and usually is purchased through software retailers. Its sale is taxable. Whether the consulting that goes with the software is taxable or nontaxable depends on the facts and circumstances described below.

Custom software is designed to the specifications of a single user and can include a program compiled from separate modules, as long as the compiled program is for the single user for which it has been tailored.

Custom software programs sold to the original user are not taxable.

An example of a custom software package is one compiled from separate modules, such as a payroll program compiled for a particular user to their specifications and written through the use of separate modules, such as the federal module, California module, Mississippi module (or any other state or country) with a specifically designed user reporting package.

Regardless of whether one is doing a custom or canned program, any program delivered electronically without hard media in the form of tangible personal property is not subject to tax. So, deliver canned programs electronically (otherwise they will be taxable). Also, if there is any question that a program qualifies as a "custom computer program," deliver it electronically to avoid tax.

Program maintenance is not subject to sales tax if all the maintenance is done online or electronically.

These rules are for California. Each state has its own rules and may not recognize an exemption similar to California's custom computer program exemption or electronic delivery.

Thanks to the following TaxTalk participants for their contributions to the above items: CPAs Jim Counts, Walt Curtis, Kip Dellinger, Bob Petersen, Larry Pon, Ed Rich & Rick Sinclair; and also to Chuck Rettig, JD.

Leonard W. Williams, CPA is a Sunnyvale-based sole practitioner. A member of CalCPA's Committee on Taxation, the AICPA Tax Division and a former Peninsula Chapter president, you can reach him at [e-mail].

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