If a business collects New York sales tax
, it is inevitable that it will face a sales tax audit at some point. NYS sales tax audits have been increasing in recent years as NYS tries to obtain more revenue from businesses who collect sales tax.
NY state is not alone; there has been a general increase in the number of income and sales tax audits nationwide for small and large businesses alike. According to the US Census Bureau in 2018, over 5 million Americans were audited by federal and State tax authorities and that number has increased overtime. It used to be rare to be audited, but it has become more likely lately. However, the specific reasons why NY State has seen such a large increase in sales tax audits remains unclear. NY State has announced that NYS sales tax audits are increasing because of new software to more easily cross reference NYS Tax Returns with information received from NY’s major banks.
Sales Tax Audits
The sales tax audit process is easy to understand. NYS Department of Taxation & Finance auditors review NYS sales and income tax returns filed by taxpayers to ensure that all NYS sales tax liabilities are accurately reported and paid. If additional NY State taxes, interest or penalties are owed, the NYS Department of Taxation & Finance will bill for these amounts. The penalty for not reporting all sales or collected sales tax is harsh. NYS can assess a penalty on any unpaid NYS sales taxes of up to 30% for not paying or not filing the tax returns, and interest charges as high as 14.5%. If the sales tax unremitted is high, there is even the possibility of tax warrants
, asset seizures, and criminal charges
NYS Sales tax returns are due on the 20th day of the month following the filing period, which is usually during the first quarter of NYS taxable sales made in NY.
Sales Tax Reporting
In NY State, by law, businesses must report all taxable sales in NY State and collect NY state sales tax from their customers who are located in NY State. There are only certain exceptions to this rule for goods sold via the telephone or internet where the buyer is out of state, and does not bring the item back into NYS, or where the purchaser is reselling the item.
Taxpayers can avoid a large tax bill related to a NYS sales tax audit if they maintain complete books and records, keep receipts (detailed Z-Tapes) in a safe place, have good internal controls over financial activity.
Sales Tax Problem Warning Signs
The trouble starts when a taxpayer does not have adequate records, such as Z-Tapes. NYS Tax Law requires NYS taxpayers to maintain records, including NYS sales tax records, on the basis of reporting periods required for NYS returns. If a NY State business prepares NYS tax returns using annual reporting periods, it will have records at least every three years. The three-year rule also apples to quarterly sales tax filers. If the taxpayer business does not keep adequate records, they may be fined separately for that as well. Here is a link to the actual record keeping rules: Recordkeeping Requirements for Sales Tax Vendors (ny.gov)
New York Sales tax audits are serious matters that can ruin businesses if not handled properly. Legal advice is often necessary if an audit has occurred or is anticipated in order to try to minimize the financial burden. To learn more about NY state income taxes and NY state business taxes and sales tax audits