A California percentage rent audit starts with the executed lease. Identify the sales definition, exclusions, reporting period, breakpoint and audit rights. Then reconcile the tenant’s reports to the records the lease allows you to inspect. A bank deposit alone does not establish the rent due.
The owner needs to see how the reported sales became a rent calculation and which differences remain unresolved. Keep the lease provision, source report and calculation together so another person can follow the work.
Define gross sales before testing the reports
Read the executed lease and amendments before deciding what belongs in gross sales. Check how they address sales made at, from or attributable to the premises, including cash, credit, debit, gift cards and digital wallets. Do not substitute a preferred definition for the one the parties signed.
Check the stated exclusions
Look for the treatment of sales tax, bona fide returns and allowances, employee tips, employee purchases at cost, inter-store transfers without consideration and wholesale transactions. These are items to examine against the lease. They are not automatic exclusions from every California retail lease.
Trace online orders, gift cards and adjustments
For delivery platforms, marketplaces and buy-online-pickup-in-store orders, identify where the order was placed, fulfilled and recorded. Determine whether the lease includes that channel and whether the POS and platform reports both contain the same sale. A platform’s net remittance can conceal fees and timing differences.
For gift cards, record issuance and redemption separately and apply the lease’s treatment without counting the same amount twice. Check discounts, returns and chargebacks as distinct transactions; do not treat every chargeback as a permitted rent deduction.
The CDTFA gift-certificate annotation explains a particular sales-tax treatment when certificates are used to buy merchandise. It does not determine a lease’s percentage-rent definition or establish when every gift-card transaction enters rent calculations.
Calculate the breakpoint and credit prior payments
The California Department of Real Estate glossary describes a percentage lease as rent based on the tenant’s business, usually with a minimum rent. For an audit, use the actual lease’s formula, including any negotiated breakpoint, tiers, period adjustments and payment credits.
Illustrative annual calculation: Assume a lease expressly provides $60,000 annual base rent plus 6% of annual lease-defined sales above a natural breakpoint calculated as base rent divided by the percentage rate. Assume verified annual sales under that definition are $1,200,000.
The breakpoint is $60,000 ÷ 0.06 = $1,000,000. Sales above it are $1,200,000 − $1,000,000 = $200,000. Additional percentage rent is $200,000 × 0.06 = $12,000.
If $9,000 of percentage-rent installments has already been paid for that same year, the remaining reconciliation amount is $12,000 − $9,000 = $3,000. The example’s total annual base and percentage rent is $72,000, before any separate CAM, tax, insurance or other charges. Do not add the $9,000 again.
These numbers are hypothetical. A negotiated breakpoint, partial year, different calculation method or other lease term can change the result. Confirm the applicable payment schedule and authority before posting an adjustment or requesting payment.
Reconcile POS activity to deposits and rent-defined sales
Choose one reporting period and follow its transactions through POS exports, processor settlements and deposits. Keep period dates consistent. Identify cash separately, include relevant platform activity once and explain deposits that cross the period boundary.
Illustrative deposit reconciliation: Assume an all-card period has $100,000 in recorded customer receipts before $2,000 of separately identified refunds. Assume the remaining receipts include $6,000 of separately identified sales tax, and this example lease excludes those refunds and that tax. The reports keep tax and refund amounts separate so neither is deducted twice.
Also assume $2,000 of processor fees, $1,000 of prior-period settlements deposited this period and $3,000 of this period’s receipts awaiting settlement. The deposit is $100,000 − $2,000 − $2,000 + $1,000 − $3,000 = $94,000.
Rebuild current-period receipts from that deposit: $94,000 + $2,000 fees + $3,000 awaiting settlement − $1,000 prior-period settlements = $98,000 after refunds. Subtract the example’s $6,000 sales-tax exclusion to reach $92,000 of lease-defined sales.
The processor fee explains the difference between sales activity and cash received. It is not an automatic deduction from rent-defined sales. This example assumes no other transactions or adjustments; use actual reports and the lease for a real reconciliation.
Match reporting and record retention to their actual requirements
Check the lease for monthly reports, an annual statement certified by a tenant officer or accountant, category and tender detail, and any cooperation obligation. Where those requirements exist, track the due dates and missing records. Where they do not, identify the gap before treating a preferred reporting package as mandatory.
CDTFA’s sales and use tax record-retention guidance generally calls for at least four years of required records unless the department authorizes earlier destruction in writing. Records covering a tax audit must remain available through completion, and related records should be retained while a tax dispute remains unresolved. POS data scheduled to be overwritten needs preservation for the required period.
Those are tax-record requirements. They do not create a landlord’s inspection right, establish a lease audit’s look-back period or make taxable sales identical to rent-defined sales. Reconcile each report’s definitions and reporting period rather than assuming the tax return, POS total and bank deposits must match.
Verify audit authority before requesting records
Locate the lease provisions addressing notice, inspection location, audit period, permitted records, confidentiality, cooperation and any deadline for raising a discrepancy. Follow the agreed process, whether inspection occurs at the premises, an accounting office or through an authorized electronic record exchange.
For a new or amended lease, make those terms explicit during negotiation. For an existing lease, do not impose missing audit rights or a new record obligation through a checklist. Check any cost-shifting clause and its precise trigger before attributing audit costs to the tenant; do not assume that a discrepancy alone authorizes the charge.
Tell the tenant which contractual provision supports the request, what period is being examined and what records are needed. Preserve the notice and delivery record. If an interpretation is disputed, identify the exact language and unresolved question before escalating under the governing documents.
Keep the audit file traceable
Maintain a tenant-specific file with the following records, subject to the lease’s access and confidentiality terms:
- Executed lease and amendments, with the applicable gross-sales definition, exclusions and rent formula identified.
- Monthly sales reports, required annual certifications, and POS exports by category and tender type.
- Permitted bank or processor summaries and delivery-platform or marketplace statements, with reporting periods noted.
- Audit notices, delivery records, correspondence, missing-record requests and unresolved interpretations.
- Calculation schedules tying reported sales, permitted exclusions, deposits, percentage rent and prior payments together.
Start by tracing a representative month end to end. Record the source and lease basis for each exclusion. Expand the review when a difference or missing record warrants it; one month’s agreement does not establish that the whole year is correct.
Separate a reporting error, a settlement timing difference and a disputed lease interpretation. Show the amount, supporting record and proposed next action for each. A variance can point to an overpayment, an underpayment or an unresolved question; it is not proof of misconduct or an automatic collection instruction.
Use the findings to resolve the next open item
When records are incomplete, list the missing document, period, relevant lease provision and person handling the request. Follow the applicable notice and escalation provisions. Keep unsupported amounts and disputed interpretations visibly unresolved rather than presenting an estimate as verified rent.
Prepare a one-page summary of the actual lease’s sales definition, exclusions, reporting dates, record requirements and audit procedure. Use it alongside the source documents, not as a substitute for them. The summary is an operating aid; it cannot guarantee that disputes will be avoided.
At the owner review, show the reconciled amount, prior payments, remaining questions and decision needed. Coastline’s commercial property management scorecard offers a related way to connect income changes and owner decisions to their source records. Start the next audit step with the unresolved item and the document needed to resolve it.
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