As NYC CPAs we know that sales tax rules are often confusing for New York State business owners and their ambiguous nature can increase the chances that an organization reports sales tax incorrectly. Incorrect sales tax reporting, in addition to other factors such as the geographic location of your business or the amount of cash sales you process, can raise a red flag to the New York State Department of Taxation and Finance (NYSDTF), which has recently increased its scrutiny of sales tax activity. Our NYC CPAs have compiled the following details to help you with NYC sales tax audits.

The incorrect or underreporting of sales tax is a serious offense in the eyes of the NYSDTF and may lead to a sales tax audit of your business and, eventually, to tax assessments and interest and penalties owed—for which officers of a company and its owners can be held personally liable. In addition to financial fines, the underreporting of sales tax in New York, whether it is intentional or accidental, can also trigger a criminal investigation. As such, it is critical to ensure that you report your New York and NYC sales taxes correctly and in a timely fashion.

While reporting and remitting the proper amount of sales tax may seem simple enough, if you reference the current tax rate schedule on Form ST-100 (the New York State and Local Quarterly Sales and Use Tax Return form), there are 47 different rates listed for various counties and cities. If you do business in several different locations within the state, the calculations can become quite complex. In addition to ensuring that you are using the correct tax rates to calculate the sales tax you owe, you must also substantiate your totals with adequate records of your sales transactions and sales tax payments. If you fail to do so, it is not only contrary to New York State tax law (which states that every business required to collect sales tax must keep records of every sale so the amount of tax due can be determined), but it will also be catastrophic in the event that your business is selected for a sales tax audit by the NYSDTF.

What to Expect if You Receive a New York Sales Tax Audit Notice

If your business receives a sales tax audit notice, don’t panic. Your best plan of action is to talk with a tax professional experienced in handling sales tax audits. Be prepared, NYSDTF will likely try to prove that you owe additional taxes. As such, facing a sales tax audit without professional help is not advisable, especially given the complex nature of New York State’s sales tax schedules and laws.

For business owners facing a sales tax audit, the onus is on you to provide documentation to auditors that prove sales tax was a) paid and b) it was paid in the correct amount. The NYSDTF requires that a business owner must maintain records of sales, guest checks, cash register “Z-tapes,” and all original sales documents. Failure to maintain these records, or if your records are deemed incomplete by the New York State Department of Taxation and Finance, you will be subject to fines and paying the proper amount of sales tax due as based on a sales tax audit.

In addition to recouping any additional sales tax owed, the NYSDTF can also impose a monetary fine on individuals who are deemed to be a “responsible person.” A responsible person is defined as someone who is in charge of collecting sales tax or who signed the tax returns for the business. The “responsible person” could be a manager, an owner, an officer, or any combination of individuals. If the business is unable to pay back taxes as a result of the sales tax audit, the NYSDTF will try to collect the liability from responsible persons associated with the entity.

What NYS and NYC Sales Tax Auditors Look For

As a sales tax audit proceeds, there are numerous items and conditions that an auditor will commonly look for in their effort to get you to pay more sales tax. Here are some of the most common errors that may be identified by a New York sales tax audit and what you can do to avoid them:

  1. Incorrect or absent exemption and resale certificates. If you do not possess proper exemption certificates, some auditors may allow you to attempt to get them retroactively, but that is not something you should rely on. As for resale certificates, if they are not on file, the auditor will typically determine an error rate and project backwards to assess tax and penalties—which can be substantial.
  2. Unreported sales. Mistakes happen and certain sales can go unreported, but as a business owner it is your responsibility to ensure that you have the processes in place to capture your sales as accurately as possible.
  3. Charging the wrong sales tax rates. As mentioned above, New York State has close to 50 different geographic areas listed in its sales tax schedule with varying sales tax rates. Staying on top of any changes to this information is extremely challenging, especially when these areas get realigned. Having a tax professional available to provide you with up-to-date information about sales tax changes is your best defense against charging incorrect sales tax rates.
  4. Not recognizing unique rules and regulations. Tax authorities often have special taxes that apply to specific goods—and New York State is no exception. There are many goods and services such as food, beverages, gambling, tobacco, timber, and fuel subject to special taxes. If you own a business such as a restaurant, convenience store or casino, it can be very difficult to follow this special tax situations—and tax authorities know it. You may be audited specifically for these types of taxes periodically and if you are found to be non-compliant it can open you up to a full-blown sales tax audit. Having a New York professional sales tax expert help you keep track of these unique sales tax rules and regulations can save you the pain and penalties associated with a sales tax audit.
  5. The accrual of sales tax. Many companies do not properly remit the sales taxes they have collected from their customers. If you are subject to a sales tax audit, your tax returns, general ledgers, invoice registers and actual invoices, sales journals and summaries of sales will be scrutinized. Auditors will use these records to calculate the sales tax that you should have remitted. To avoid having the NYSDTF do these calculations for you, make sure you do it yourself, or with the help of a sales tax professional, comprehensively—before you report and remit your sales tax.
  6. Business acquisitions. If you have acquired another business, you have just upped the ante when it comes to sales tax compliance. If you acquire a business in a different market, you may have a new tax nexus and new tax liabilities to contend with—and you may receive a notice for a sales tax audit as a result. Specialized expertise is generally required to ensure that you are properly reporting pre- and post-acquisition taxes—so contact an experienced NYC CPA for assistance.
  7. E-commerce sales. New York State is “ahead of the curve” in regard to collecting sales tax from online sales of taxable goods to it residents and businesses. Several years ago the State instituted “The Amazon Law” requiring even large non-resident businesses to charge sales tax on applicable sales within its geographic boundaries. While sales tax jurisdiction related to ecommerce still resides primarily at the federal level, there is a growing movement of individual states requiring vendors to collect and remit taxes for sales made to people and businesses within their region. New York State is one of the states that has adopted this stance, so online businesses with a geographic tax nexus in the state or an associate nexus based on sales activity within the state are advised to make sure they are properly charging, documenting, and remitting their sales tax from these transactions.

Don’t Face a NYS Sales Tax Audit Alone—Get Expert Help From a NYC CPA

As always, the best defense is a good offense. If you are facing a New York State sales tax audit, don’t go it alone. MEDOWS CPA is experienced in helping business owners correctly report and file their New York sales taxes and the in-depth expertise you need representing you during a sales tax audit in the State of New York. Our NYC CPA firm will help you simplify and prepare your New York sales tax reporting and documentation while giving you peace of mind that you have expert counsel representing your business in the case of an NYC Sales Tax Audit. Contact us now.