Unbeknownst to many companies, the federal government, along with state and local governments sometimes use third-party, for-profit tax contractors to help them find and collect unpaid taxes from companies operating within their jurisdictions. While these independent contractors do not have the same level of authority as a government entity, some governments do use independent contractors to audit companies, and they consider these third-party auditors to have the full authority of the government in performing the audit. Therefore, companies should carefully consider how to respond to any inquiry or notice from such a contractor.
One of the largest third-party tax collection services, Muni Services, recently sent a spate of notices to companies identified as potentially providing communications services in California. Specifically, the notices focus on the Los Angeles Communications Users’ Tax (“CUT”), the California Utility User Tax (“UUT”), and the newly effective California prepaid mobile telephony services (“MTS”) surcharge. The notices generally ask the targeted company to work with Muni Services to determine whether the company should be paying the relevant tax. Many notices include a declaration page asking the recipient to declare that it is not subject to the tax at issue or state for which services the recipient should be paying the tax.
Any company receiving such a notice should first carefully consider the company’s response. Importantly, these notices alone do not initiate a tax audit, but failure to respond or an admission of liability could lead the governing authority to investigate further. The notice will contain a deadline by which Muni Services requests a response, but there is no apparent penalty for failing to respond by the deadline. However, ignoring the notice entirely could cause the tax collection service to notify the relevant taxing authority that the target company did not respond to the notice.
On the other hand, responding to the notice and conceding a company is subject to the tax or taxes listed in the notice can subject the company to future tax payments as well as back taxes and potentially an audit by the taxing authority. Therefore, if a company determines that it is or may be subject to the taxes in a notice, it should contact counsel to determine the best path of remediation.
If you have any questions about California’s CUT, UUT, or MTS surcharge, would like to evaluate whether any of these charges apply to your company’s services, or would like help responding to a Muni Services tax notice, please contact Jackie R. Hankins at jrh@commlawgroup.com.
