CDTFA Audit Red Flags for Online Sellers

Why E-commerce Businesses in California Are Being Targeted

If you’re selling online through Shopify, Etsy, Amazon, or your own website, and shipping products into or from California, you’re on the CDTFA’s radar — whether you realize it or not.

The California Department of Tax and Fee Administration (CDTFA) has dramatically increased audits of online sellers, especially after the Supreme Court’s Wayfair decision. And if your sales tax compliance isn’t airtight, they’ll come knocking.

In this article, we’ll break down the top audit red flags for online sellers, what records the CDTFA scrutinizes, and how to protect your business.

Already concerned about your audit risk? Learn more about our sales tax audit defense for online sellers.

Why Online Sellers Are Getting Audited in California

Since Wayfair, California enforces economic nexus laws — meaning even out-of-state sellers can owe sales tax if they meet revenue or inventory thresholds in the state.

Meanwhile, CDTFA enforcement teams:

• Pull 1099-K data from Stripe, PayPal, and Amazon
• Run automated sales tax data comparisons
• Focus on mid-size sellers who don't have legal teams backing them

CDTFA Red Flags That Trigger Audits

1. Mismatched Sales Data

If your:

• 1099-K totals
• Sales tax filings
• And income tax returns don’t all align, you’re at risk. The CDTFA compares these sources and assumes unreported income if discrepancies exist.

If you’ve received notices from both the CDTFA and FTB, you’re likely facing a broader tax issue.

2. Improper Marketplace Handling

Even though Amazon or Etsy may collect sales tax, you’re still responsible for reporting those sales properly.

CDTFA may audit you if:

• You report marketplace sales incorrectly
• You don’t file when required
• You omit platform earnings on income tax filings

3. No Seller’s Permit or Late Registration

If you crossed the $500,000 threshold in California sales and haven’t registered for a Seller’s Permit — you're exposed.

They also audit:

• Amazon FBA sellers with inventory stored in California
• Sellers with physical nexus (e.g., employees, pop-up shops)

4. Missing Local Tax Allocation

CDTFA wants sales tax broken down by district — not lumped statewide.

Red flags:

• Filing flat statewide totals
• Skipping Schedule B district allocation
• Not tracking destination-based delivery sales

5. Frequent Returns or Refunds

Heavy refund activity can trigger audits because it suggests:

• Income manipulation
• Inconsistent reporting
• Possible suppression of taxable sales

6. Selling Digital Products Without Clarification

Online courses, software, memberships, and e-books have complex taxability rules. Misclassifying taxable digital goods as nontaxable can lead to back-tax assessments.

What Happens in a CDTFA Online Seller Audit?

The CDTFA will demand:

• Platform sales reports (Amazon, Shopify, PayPal, Stripe, etc.)
• 1099-Ks
• Income tax returns
• Sales tax returns (CA)
• Bank statements

If you can’t explain variances or prove proper collection and remittance — they’ll estimate. And they always estimate high.

Penalties for Noncompliant Sellers

If audited, you could face:

• Tax assessments for 3+ years
• 10–25% penalties
• 8–10% interest
• Liens or bank levies
• Cross-referral to Franchise Tax Board collections or even EDD

If you’re facing FTB issues on top of a CDTFA review, we can coordinate a multi-agency defense. (Link to: /ftb-tax-problems-california)

How to Stay Off the Audit Radar

✅ Get a California Seller’s Permit if required
✅ Track and report sales by district
✅ Reconcile 1099-Ks to your filings
✅ Separate platform sales from direct site sales
✅ File regularly, even if sales are zero
✅ Keep supporting records for all platforms

Why Work With Boulanger CPA

We help online sellers:

• Prepare for and survive CDTFA audits
• Fix improper registration and filing gaps
• Reconcile multi-channel sales tax data
• Avoid penalties through clean-up filings or voluntary disclosure
• Defend against aggressive collection actions

Whether you're Shopify-based, Amazon FBA, or hybrid — we’ve done this before.

Schedule Your Free Strategy Call

Worried about an audit? Already under review?

We’re based in Orange County and represent e-commerce clients across California. Let’s protect your business and fight for a fair outcome.

👉 Schedule your free audit strategy call

FAQ – CDTFA Audits for Online Sellers

📣 About the Author

Marc Boulanger, CPA is the founder of Boulanger CPA and Consulting PC, a boutique tax resolution firm based in Orange County, California and trusted by high-income individuals and business owners across Southern California.

He is the author of Defend What’s Yours: A California Taxpayer’s Guide to Beating the IRS and FTB at Their Own Game, available now on Amazon. The book offers a step-by-step plan for resolving IRS and FTB tax debt without losing your business, your home, or your peace of mind.

With over a decade of experience resolving high-stakes IRS and State tax matters, Marc brings strategic insight to complex cases involving wage garnishments, bank levies, unfiled returns, and six-figure tax debts. He is known for helping clients reduce or eliminate tax liabilities through expertly negotiated settlements and compliance plans.

Marc is a Certified Public Accountant licensed in California and Oklahoma and holds the designation of Certified Tax Representation Consultant. He is a member of the American Society of Tax Problem Solvers (ASTPS) — the national organization founded by the educators and practitioners who have trained thousands of CPAs, EAs, and tax attorneys in IRS representation strategy.

Every case is handled with discretion, proven methodology, and direct CPA-led representation — not call center scripts.

📍 Learn more at www.orangecounty.cpa or call (657) 218-5700.