AA Kitchen Appliance: Credit Quarters Divided the Panel, but the Majority Sustained the Sales-Tax Audit

A California sales-tax audit excluded quarters in which reported sales exceeded bank deposits, while assessing differences in the other quarters. The majority sustained that method on this record in Appeal of AA Kitchen Appliance, Inc., 2026-OTA-415, OTA Case No. 231014566 (Jan. 23, 2026), while a partial dissent challenged the treatment of credit quarters. This nonprecedential Office of Tax Appeals opinion is in the official September 2026 collection. A later June 15 rehearing denial is discussed separately below. AA Kitchen Appliance, opinion at 1.

The audit compared deposits with reported sales

The taxpayer operated appliance stores in San Francisco and Millbrae. For July 2017 through June 2020, the majority reported deposits of $17,769,376 and reported sales including tax of $17,117,963. Removing quarters that produced credits increased the difference used in the calculation. After treating 95% as taxable and backing out sales tax, CDTFA calculated $978,476 in unreported taxable sales, later reduced to $970,899 on reaudit. AA Kitchen Appliance, opinion at 2–4.

The taxpayer argued that timing differences between receipts and accrual reporting made that quarter-by-quarter approach overstate sales. The issue was therefore not simply whether deposits exceeded sales in the aggregate, but whether the method and records justified the assessment.

The majority found a rational basis and insufficient rebuttal

Under the authorities discussed in the opinion, CDTFA first had to establish a reasonable and rational basis for its determination. The taxpayer then had to support a challenge with evidence rather than uncorroborated assertions. The statutory presumption concerns gross receipts from retail sales; it should not be restated as a rule that every bank deposit is taxable. AA Kitchen Appliance, opinion at 5–6.

The majority also considered a second-quarter 2020 invoice test: Four omitted invoices totaling $89,538, a $12,059 paid invoice previously recorded as void, and $17,793 associated with a duplicate invoice number. Projecting the 7.87% error rate produced an amount higher than the bank-deposit determination. The majority treated that comparison as support for reasonableness and rejected the taxpayer’s unsupported timing explanation. The test was supporting evidence for the majority’s analysis, not independent proof of the exact tax treatment of every deposit. AA Kitchen Appliance, opinion at 6.

The penalty rested on prior instructions and repeated deficiencies

The panel explained that the approximately 6% reporting discrepancy alone did not establish the negligence basis asserted. But Revenue and Taxation Code section 6484 also addresses intentional disregard of rules. A prior audit had specifically instructed the taxpayer to maintain complete records, and the same deficiencies persisted. The panel sustained the 10% penalty on that basis. AA Kitchen Appliance, opinion at 7–8.

The significance lies in the prior instructions and conduct, not a numerical rule that every discrepancy of a particular percentage requires a penalty.

The partial dissent disputed the audit method

Administrative Law Judge G. Turner questioned accepting debit quarters while disregarding quarters in which reported sales exceeded deposits without proving those reported sales were incorrect. The dissent used an alternative deposit total of $17,760,718 and described approximately 3.7% underreporting. Those figures belong to the dissent’s analysis and should not be mixed into the majority’s calculation. The dissent addressed the agency’s initial showing and the cash-versus-accrual problem. It concurred in sustaining the penalty because of the prior recordkeeping instructions. AA Kitchen Appliance, partial dissent at 9–11.

The majority’s disposition controls this nonprecedential appeal. The dissent helps identify the records that could matter in a different timing dispute; it is not the holding adopted by the panel.

The later rehearing request was denied

On June 15, 2026, OTA denied rehearing in AA Kitchen Appliance, 2026-OTA-416. Repeating the timing argument did not establish the asserted ground for rehearing. That June ruling is a later development, not part of what occurred on the January editorial date.

For a comparable audit review, bring the quarter-by-quarter workpapers, original invoices, deposits, returns, timing reconciliation and prior audit instructions. Those records allow counsel to test the method and the penalty basis separately.