New York State Sales Tax Audits on the Rise

William J. Killory, CPA, Member (Jun, 2016)

New York State is always in search of sources of funds.  We have noted an increase in the frequency of sales tax examinations conducted by New York in recent months.  New York has very sophisticated economic analytics that help them focus on targets that are likely to pull in additional funds from an examination.  The Department of Taxation and Finance has collaborated with IBM to develop audit risk models to use as an early warning system to aid them in detecting compliance risks and aiding in developing audit programs.

New York sales tax can be a very complicated system.  There are general rules, there are exceptions to the rules and then there are quirky results from the exceptions.  Most goods are subject to sales tax.  Food is tax exempt and candy is taxable.  A single Twix candy bar that you buy at the Wegmans cash register is taxable as a candy, but a box of Twix candy bars that you purchase in the cookie aisle is exempt as a cookie.  Identical product, but a different result.

Sales tax related to the construction industry is particularly complex.  A capital improvement is not directly subject to sales tax.  A capital improvement must substantially add to the value, prolong the life of real property or become part of the real property such that the removal would cause damage.  It is intended to become a permanent installation.  The contractor does not charge sales tax on the capital improvement, but does pay sales tax on the material that go into the installation.  A capital improvement certificate is required to demonstrate the nature of the expense.

Repair, maintenance and installation services are generally taxable in New York.  Sales tax is charged on the entire cost including materials and labor.  The contractor can claim a credit for the sales tax paid on the materials since that is effectively a purchase for resale.  The credit can be claimed with the normal sales tax filing, but a detailed schedule must be provided so that New York State can audit if they so choose.  Repair and installation services for a not-for-profit agency or governmental unit are not subject to tax and the contractor can claim a credit for the sales tax paid on the materials for that contract.  Repair or installation service directly related to installation of machinery or equipment for manufacturers are similarly exempt form sales tax.

Some companies, such as National Grid, have direct pay permits that allows them to pay sales tax directly.  The rationale behind that is because there is doubt as to whether the installation or amount is subject to tax such as the case of an exempt installation of manufacturing equipment.  In this case, National Grid takes the responsibility for proper accounting and payment of the applicable sales tax.  One cannot just blindly accept a direct pay permit if you know that it is for a non-exempt purpose.  The sale of office supplies to a holder of a direct pay permit is not likely to qualify.  The contractor would treat this the same as a fully taxable transaction and request a credit for tax for tax paid on materials.

An area that New York focuses on is use tax.  With internet commerce burgeoning the possibility that sales tax was not collected is pretty high.  If you purchase goods from outside of New York,  you are subject to a compensating use tax.  Service businesses that do not collect sales tax still must remit use tax for these untaxed goods.  This would also include information services and software, as well as the typical office supplies and technology equipment.  Some internet vendors will collect sales tax and others will not.  A purchase from Amazon will have sales tax added in.  A purchase from Amazon Marketplace may or may not have sales tax included.  For purchases that do not have sales tax you will need to account for the purchase and pay in the tax to New York with your normal sales tax filing.

Sales tax in New York can get very complicated very quickly.  The Department of Taxation and Finance is primed for going after what they believe is missing revenue.  If New York State sends you an audit letter, by all means call us.  If you have any doubts or questions as to how to determine what is, and what is not taxable and how to account for it all, please give your Dermody, Burke & Brown professional a call.

 

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

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