State sales tax audits will always be an important source of revenue. In fact, in New York state and local sales tax accounts for almost 17% of the state’s revenue. Year over year, most states, including New York have increased their audits and have figured out ways to audit certain industries more efficiently. In addition to the falling costs of auditing certain industries, New York’s Department of Taxation and Finance has targeted industries with a history of underreporting like restaurants, bars, and convenience stores.
This article discusses the rules relating to the convenience store and gas station industry audits by New York’s Department of Taxation and Finance. It will also provide some solutions you definitely want to know about if you are in the convenience store industry in New York.
New York Sales Tax Basics for Convenience Stores and Gas Stations
As a starting point, New York imposes a sales tax on the sale of tangible personal property, unless there is a specific exemption that removes it from New York taxation. Convenience stores and gas stations are somewhat complex from a sales tax perspective because they combine many different attributes of different industry types under one roof. At one location you can purchase gas, sit in and eat like a restaurant, buy food, groceries, and medicine to-go like a grocery store, or even buy a myriad of different merchandise, like a general retail store. They also can be very diverse ranging from a small store with limited items to a large store containing thousands of unique product types.
Most items sold by a convenience store are tangible personal property, such as food, groceries, soft drinks, candy, cigarettes and tobacco, newspapers, lottery tickets, and toiletries and hygiene products. If there is a gas station in connection to the c-store, likely also sell gasoline products, motor oil, and motor fluids, like washer fluid or antifreeze. Therefore, unless exempt, those items are subject to NYS sales tax and the local tax if applicable.
Like many states, New York has exemptions for many grocery-type items. Common examples of exempt food items include:
- Fruit and produce
- Prepackaged or fresh deli meat and cheeses
- Dairy products like milk, yogurt, and butter
- Snacks like chips, crackers, cookies, and jerky
- Ice cream
- Bakery items (unless sold to be eaten on-site, like a doughnut)
- Over the counter drugs and medicine
Conversely, examples of items, which are taxable because no exemption applies are:
- Tobacco Products and cigarettes
- Heated, prepared foods like hot dogs, pizza, sandwiches, chili
- Milkshakes and made to order ice cream
- Beverages sold in cups
- Beer, wine, and alcohol
- Hot coffee
- Bottled water
Because a gas station or convenience store sells items similar to that of a grocery or other food store, similar rules apply. For more detailed rules on rules relating to food and beverage sales, New York has Bulletins such as:
- Food & Food Products Sold by Food Stores
- Beverages Sold by Food Stores
- Beverage Centers and Other Similar Establishments
Many convenience stores and gas stations also offer other merchandise-type items, that again, are tangible personal property subject to sales tax unless an exemption applies. A few examples of commonly taxable items that are often purchased at a New York convenience store include
- Pet food
- Prepaid calling cards
- Household cleaning products
- Automotive fluids and supplies
- Snow brushes
- Key chains and novelty items
Some examples of non-food merchandise that are often offered by convenience stores include:
- Lottery products
- Gift cards
- Money orders
- Clothing and footwear under $110/item
Of Course, Gasoline and diesel sales have their own unique rules. Generally, sales of gas and diesel are taxable but are generally paid by the seller. Other unique items, like Kerosene, also have their own set of rules.
Strategies to Reduce a NY Sales Tax Assessment or Prevent an Audit
In addition to the strategies already discussed, these tactics shouldn’t be overlooked when defending your business against a New York sales tax assessment, or in some cases, prevent the audit in the first place:
- Compare your New York Sales and Use Tax Return against third-party data. Usually, the auditor comes in armed with your beer and cigarette purchases, your federal income tax return, and your 1099-k report (credit card sales). It is advisable to obtain and compare this data against your sales tax returns. Better yet, have our sales tax experts do it for you. If there are inconsistencies, we can help you clean up your records and procedures to keep you out of trouble going forward and reduce past exposure by amending returns or filing a voluntary disclosure.
- If your records are unorganized, missing, or you find large discrepancies, consider the NY DTF voluntary disclosure program. If your 1099-K’s and your federal income tax return greatly exceed your sales tax returns, you should consider a voluntary disclosure BEFORE GETTING AUDITED. The voluntary disclosure program benefits your business by taking penalties off the table, and in most cases, the NYDTF agrees not to audit the period(s) disclosed, allowing you to aggressively disclose your true sales figure without retribution, rather than having the auditor overestimate your sales for you. Additionally, entering the VDA program dramatically decreases the odds of being audited by the state. The VDA program is only available if you contact the state first.
- Do your homework before the audit starts. Start doing your homework and audit preparations immediately after receiving an audit notice from the New York Department of Taxation and Finance. Knowing what we discussed here, at a minimum, pull your 1099-k’s, POS reports, and New York sales tax returns for the period being audited. If the auditor requests documentation that you know is going to result in higher sales amounts, consider not producing or if you do produce, have an explanation prepared.
- Carefully account for nontaxable sales. Tips are the number one nontaxable item that is likely shown on your 1099-k. Remember, the 1099-k reports total dollars you received via credit card from a given bank. You must have a breakdown to account for the portion that tips, otherwise the auditor will treat the entire report as taxable. In the absence of other documentation showing tips, pull your IRS W-3 report as it should show tips paid to employees.
- Carefully consider documentation provided to the auditor. Generally, less is more during a sales tax audit. While it’s important to work with your auditor professionally, and in good faith, they don’t necessarily need everything they ask for and you should consider the potential consequences of providing unnecessary documentation. You should provide documentation that reasonably shows your sales, but anything beyond that should likely not be provided as it isn’t necessary. Our team sees restaurants that have over-provided documents to the NYDTF on a daily basis and the results can be very damaging. The more documentation provided, the more likely it is that the NYDTF will finish its audit with an extravagant sales tax assessment. Be careful, think ahead, and always know the answers and outcomes of the documentation provided to the state. Or, better yet, get a sales tax professional on your side who can evaluate what to and what not to provide to the auditor.
- Do not sign anything or make a payment on an assessment until you have talked with someone experienced in the New York sales tax audit defense. In New York, making a payment or signing an audit report, waiver of restrictions, among others, may automatically waive your right to a review of your audit.
As the New York Department of Taxation and Finance increases its access to, and reliance on, third-party reporting, industries like restaurants and bars can expect to see an increase in the number of audits conducted. Knowing what info the New York DTF has access to and how they use it during a sales tax audit is the key to successfully managing the auditor and the outcome. For businesses that will inevitably have a hefty sales tax liability after an audit, it makes even more sense to be proactive and consider hiring a professional to help amend incorrect sales tax returns or file a voluntary disclosure program.
Whether you’ve just received an audit notice or you’re losing sleep over how to limit your current sales tax liability, it makes sense to talk to a sales tax professional with a proven track record. Schedule a free 30-minute call with one of our sales tax experts. Whether you hire our firm or not, we offer a thorough and honest evaluation for free so you can decide how to proceed with knowledge and confidence.