Industries Most Targeted by CDTFA Sales Tax Audits in California
The California Department of Tax and Fee Administration (CDTFA) doesn’t audit businesses randomly. Certain industries are repeatedly flagged for sales tax audits, and if you operate in one of them, it’s not a question of if you’ll be audited — but when.
The CDTFA prioritizes businesses with cash-heavy operations, inventory movement, and a history of compliance issues across the sector. Audits are triggered by patterns, not just individual mistakes.
At Boulanger CPA and Consulting PC, we’ve represented business owners across California in nearly every high-risk category. In this guide, we’ll break down the industries most often targeted by CDTFA audits — and what you can do to protect your business before the state comes calling.
Why CDTFA Targets Certain Industries
Sales tax enforcement is all about risk and recoverability. The CDTFA audits industries that
- Frequently underreport sales
- Accept large volumes of cash
- Claim high rates of exempt sales
- Struggle with POS or inventory recordkeeping
- Have historically produced high audit yield
These industries are tracked closely using benchmarking, sampling techniques, and internal compliance scores.
Top Industries Most Targeted by CDTFA
1. Restaurants and Bars
Why they’re targeted:
- High cash volume
- Frequent underreporting of alcohol or tip income
- Inconsistent POS reports vs. tax filings
- Common use of modifiers, voids, and unrecorded comps
- Susceptibility to
sales suppression software
Risk level: Very High
2. Construction Contractors
Why they’re targeted:
- Misclassification of materials vs. labor
- Taxability of materials supplied vs. purchased
- Poor recordkeeping on taxable vs. exempt sales
- Often miss use tax obligations
Risk level: Very High
3. Retail Stores (Clothing, Electronics, Convenience Stores)
Why they’re targeted:
- Inventory turnover doesn’t match reported sales
- Frequent POS errors or “ghost inventory”
- Exempt sale abuse (e.g., resale certificates not properly verified)
- Cash skimming or inconsistent deposit history
Risk level: Very High
4. Salons, Barbershops, and Nail Spas
Why they’re targeted:
- Cash-based services with minimal documentation
- Sales of taxable retail products (lotions, tools, accessories) often underreported
- High rates of unlicensed employees and contractor confusion
Risk level: High
5. Auto Repair and Parts Shops
Why they’re targeted:
- Labor vs. parts confusion (labor is exempt, parts are taxable)
- Invoice manipulation
- Unreported or misclassified used parts sales
- Core charges and disposal fees improperly handled
Risk level: High
6. Cannabis Dispensaries and Retailers
Why they’re targeted:
- Complex overlapping tax jurisdictions (sales tax, excise tax, local tax)
- Cash-only operations (due to federal banking restrictions)
- Limited POS transparency
- High-volume daily transactions with inconsistent recording
Risk level: Very High
7. E-Commerce and Online Sellers
Why they’re targeted:
- Nexus rules not understood or followed (especially after Wayfair v. South Dakota)
- Misreporting of out-of-state sales
- Improper or no collection of California use tax
- Platform sellers (Amazon, Shopify) failing to report correctly
Risk level: High
8. Gas Stations and Convenience Stores
Why they’re targeted:
- Fuel excise tax vs. sales tax complexity
- Lottery, tobacco, and alcohol underreporting
- Skimming or underreported non-fuel retail sales
Risk level:
Very High
How CDTFA Identifies Audit Targets
CDTFA uses:
- Industry-specific
audit manuals
- Comparison to
benchmark ratios (markup %, taxable % of sales)
- Statistical modeling to flag anomalies
- Prior audit history or flagged return patterns
- Third-party data (merchant accounts, POS systems, IRS, or FTB matching)
What to Do If You're in a High-Risk Industry
If you're in one of the industries above, be proactive:
- Use
auditor-friendly POS systems with tamper-proof data logs
- Maintain
complete Z-tape or sales summary records
- Properly document
resale certificate transactions
- Reconcile
sales to bank deposits monthly
- Avoid
handwritten receipts or estimates — digitize everything
- Schedule
periodic compliance reviews with a CPA
How We Defend Targeted Businesses During CDTFA Audits
At Boulanger CPA and Consulting PC, we represent clients across every major high-risk industry. Our process includes:
- Pre-audit risk analysis
- Forensic accounting and POS reconciliation
- Strategic documentation defense
- Challenging extrapolated audit results
- Negotiating audit scope and penalty relief
- Representing clients through CDTFA appeals and settlements
Whether you're just getting your first audit notice—or preparing for the next one—we’ll help you stay in control.
Based in Orange County, Serving California Statewide
We work with:
- Restaurants in Orange, Costa Mesa, Santa Ana
- Retailers in Anaheim and Riverside
- Contractors in San Diego and Los Angeles
- Online sellers statewide
Let’s get your business audit-ready—and protected.
Call Now to Protect Your Business from CDTFA Overreach
If your industry is on this list, the CDTFA is watching. Let’s get your records right, train your team, and prepare for what’s coming.
📞 Call (657) 218-5700 or Schedule a Confidential Compliance Review
Frequently Asked Questions
What industries are most likely to be audited by the CDTFA?
Industries with high cash volume, inconsistent sales reporting, or poor recordkeeping—such as restaurants, convenience stores, gas stations, smoke shops, and liquor stores—are frequently targeted by the CDTFA for sales tax audits.
How does the CDTFA select businesses for audit?
The CDTFA uses various methods including statistical analysis, prior audit history, sales tax reporting anomalies, industry benchmarking, and tips or complaints to select businesses for audit.
Can I avoid a CDTFA audit by filing everything on time?
Timely filing helps, but it's not a guarantee. Businesses can still be audited due to industry risk, inconsistencies between sales tax and income tax returns, or unusual fluctuations in reported sales.
What should I do if I receive an audit notice?
Contact a qualified CPA or tax representative immediately. Do not submit documents to the auditor until your records are reviewed. Early strategy is critical to minimizing the damage of an aggressive audit.
Can the CDTFA audit prior closed years?
Yes, the CDTFA can go back three years under the normal statute of limitations, and even further in cases of fraud or non-filing.
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📣 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.
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