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New York Sales and Use Tax & Audit Guide

This guide is for businesses that need straightforward answers on the following New York Sales and Use Tax subjects:

  • Do I need to be collecting New York sales tax?
  • Should I be collecting or paying New York use tax?
  • What do I do if I should have been collecting but haven’t?
  • I received a New York audit notice, what should I do?
  • Guidance on fighting a sales tax assessment in New York.

Who Needs to Collect New York Sales and Use Tax?

Like most states, to be subject to New York sales tax collection and its rules, your business must:

1) have nexus with New York, and

2) sell or use something that is subject to New York sales tax.

How Is Nexus Established In New York?

According to the New York Department of Taxation and Finance, sales tax nexus is created in New York if a business has a physical presence in New York, such as:

  1. Soliciting business in New York using employees, agents, or independent contractors located in the state.
  2. Maintaining a place of business in New York, such as a store, office, or warehouse and selling taxable tangible personal property or services in New York State.
  3. Assembling, installing, servicing, or repairing products in New York.
  4. Performing repair and maintenance services to real property in New York.
  5. Owning, renting, or leasing real property or tangible personal property in New York.
  6. Delivering goods to New York customers using your company-owned or leased truck.
  7. Maintaining inventory in New York using a third-party fulfillment service, such as Fulfilled by Amazon (“FBA”).

Additionally, business that do not have a physical presence in New York, can establish economic nexus by exceeding a certain annual sales threshold in the state. See the next section for details.

Economic Nexus (Wayfair Law) And Internet Sales in New York

As of June 21, 2018, businesses located outside of New York may also be subject to its sales and use tax laws. Specifically, New York’s Wayfair law requires that a purely out of state business register with CDTFA to collect and remit sales and use tax if the business has sales of tangible personal property delivered into New York exceeding $500,000 during the preceding or current calendar year.

Which Sales Are Subject To New York Sales Tax?

General Transactions

If you have nexus in New York, the next step is to determine whether the products or services you sell are subject to New York sales and use tax. Like most states, unless an item is specifically exempt, sales and rentals of tangible personal property are subject to New York sales tax.

While the general rules seem straightforward, the application of New York’s sales tax rules and their nuances, complexities, and application to your business can get complicated. We recommend scheduling a time to review your specific situation with one of our sales tax professionals.

Common exemptions from New York sales and use tax:

  • Certain food and beverage items
  • Drugs, medicine, and medical equipment
  • Newspapers
  • Feminine Hygiene Products
  • Manufacturing machinery or equipment and associated utilities and fuel
Services

Generally, services are not subject to sales tax in New York. However, the following services are some examples of services that are taxable in New York:

  • Certain information services
  • Servicing or repairing real property
  • Interior Design Services

To add to the complexity, New York City taxes additional services performed within the city:

  • beautician services, barbering, and hair restoring
  • tanning
  • manicure and pedicure
  • electrolysis
  • massage services
  • services provided by weight control and health salons, gymnasiums, Turkish and sauna baths, and similar facilities, including any charge for the use of these facilities
  • written or oral credit rating services
  • oral credit reporting services not delivered by telephone
Software

New York imposes a sales tax on prewritten software irrespective of whether its delivery on a physical medium or downloaded. Custom software is not taxable. Remotely accessed software and SaaS is generally taxable.

Shipping & Handling

New York has traditional rules with respect to shipping and handling charges. The basics are as follows:

Shipping of non-taxable items:

If the item being delivered is not taxable, the delivery charge is also non-taxable.

Shipping of taxable items:

When a taxable product or service is sold, any charge for shipping or delivery is also taxable.

Shipping of taxable & nontaxable items:

When both taxable and nontaxable items are combined into a single charge, the entire sale is taxable.

If the nontaxable charge is separately stated, sales tax does not apply to the nontaxable item.

Further, if the delivery charge is fairly allocated between the taxable and nontaxable items, only the shipping allocated to the taxable charge is taxable.

Industry-Specific Guides for New York Sales Tax

While the general sales tax rules seem straightforward, the application of those rules can get tricky when gray areas come up. These guides were developed by New York to provide some industry-specific and topic-specific guidance:

Determining Local Sales and Use Tax Rates in New York

New York’s base or statewide sales tax rate is 4.00%. However, other taxing authorities, like counties, cities, school districts, or transit authorities can also impose a sales tax. So, the total sales and use tax rate for a given sale equals the state rate plus all applicable local taxes.

In New York, all taxable sales made within the Metropolitan Commuter Transportation District (MCTD) is subject to an additional 0.375% tax.

The district surtax applies if the sale is made within or delivered to a location within the respective county. District surtaxes are remitted to the state as part of the New York sales and use tax return. The combined New York + County sales and use tax rates for the largest 30 cities as of August 1, 2019 are listed below. A comprehensive list can be found here.

I Should Have Collected New York Sales Tax, But I Didn’t

Unlike many of our competitors who offer a one size fits all solution and blindly suggest filing a Voluntary Disclosure Agreement (VDA) in each state, our sales tax professionals will work with you to determine the best and most cost-effective solution for your business.

If you determine your business has nexus but you have not collected New York sales tax, the primary options are to:

  1. Register and pay back taxes, penalties, and interest, or
  2. Enter into a VDA to eliminate penalties (and in some cases reduce your tax liability and avoid interest).

Here is what you need to know about each option to make the best decision for your business:

Option 1: Register to Pay Back Taxes, Penalties, and Interest

Sometimes the best solution for a business is simply to register with New York and pay back taxes, penalties, and interest. A VDA is not cost-effective if the past liabilities and penalties are minimal. Be wary of the tax professionals that recommend doing a VDA in these cases, they are looking to make a buck rather than looking out for your best interests. If you’re unsure what your past liabilities are, contact us and one of our state tax professionals will work with you to conduct an analysis and help you make the right choice for your business.

When to consider registration and payment:

  • If you established nexus less than 3 or 4 years ago.
  • The sales tax penalty is LESS than the professional fees charged for the VDA.
  • Your business does NOT have a sales tax collected issue.

Beware: registering does not generally eliminate past liabilities

Option 2: Voluntary Disclosure Agreement (VDA)

New York’s VDA lookback period: 3 years.

In many situations, voluntary disclosures are a useful tool to reduce extended periods of past exposure. For example, if you should have been collecting sales tax for 10 years, the voluntary disclosure limits the lookback period to 3years. As a result, the benefit of doing a VDA often turns on:

  • Whether the VDA limits lookback period. i.e. – you established nexus more than 3 or 4 years ago.
  • The sales tax penalty savings is MORE than the professional fees charged for the VDA.
  • You have a sales tax collected but not remitted issue.

I Received a New York Sales and Use Tax Audit Notice, What Should I Do?

New York regularly audits businesses that are required to charge, collect, and remit various taxes in the state. Businesses that receive a sales and use tax audit notice should consider the following:

  • Unless you have experience handling New York sales and use tax audits, how can you trust that the state’s auditor is abiding by the rules and following proper procedure?
  • How will you know when to provide documents or when to push back?
  • Do you have a thorough understanding of your sales and use tax areas of exposure?
  • Controlling the audit is paramount to the limiting exposure and shaping the results. Are you confident in doing that on your own?

If you are unsure of the answer to these questions and you do not have experience handling New York sales tax audits, hiring a professional might be right for you. Contact us and learn how our sales tax professionals can give you the peace-of-mind and confidence you need during your audit.

Please visit our resource pages for more detailed information and to help you evaluate critical decisions during your New York sales and use tax audit.

New York Sales Tax Audit Process

The audit process usually follows the process laid out in this flowchart. See the detailed guidance for each stage of the process in the sections below.

What to Expect After You Receive a New York Sales and Use Tax Audit Notice

Many audits begin with a call out of the blue from a New York Department of Taxation and Finance sales tax auditor. Shortly after the call, your business will receive an audit notice (field or desk audit), which confirms that you were lucky enough to be chosen for a New York sales and use tax audit. To prepare for the audit, it is likely a good idea to start by getting a state and local tax professional involved.

What to Expect From A New York Sales Tax Auditor
  • Auditor will conduct pre audit research.
  • Auditor will often schedule and perform an entrance conference.
  • Records will be requested (many of which the auditor is not entitled to and does not need).
What to Expect During The Audit

New York sales tax audits generally cover a three-year period. The time it takes to complete an audit ranges from as little as several days to a year or more depending on the complexity of the business, and the completeness and accuracy of the records. Once the necessary records are received, the auditor will:

  • Conduct the audit by comparing your New York sales and use tax returns to your federal income tax returns or bank statements to determine whether all applicable sales, or gross sales, were reported on your New York sales tax return(s).

NOTE: A slight error in how tax was charged on even a single type of transaction, when multiplied over three years, can add up to a considerable sales tax liability.

  • Once the auditor is confident all sales are accounted for, they will review your exempt and out-of-state sales.
  • Conduct a use tax audit – the auditor will request a detail of certain documents / accounts to make sure use tax was properly paid on applicable purchases. Common areas audited include:
    • Advertising Expense
    • Auto & Truck Expense
    • Repair and Maintenance
    • Rent (including related party rent)
    • Office Expense
    • Miscellaneous Expense
    • Supplies
    • Equipment

Despite publications to the contrary, if a business buys an item online without paying use tax, the business still has an obligation to remit the tax to New York. This often leads to shocking results for the unsuspecting taxpayer during an audit.

After the Audit – Understand and Defend Your Businesses Rights

Upon completion of the audit, there will usually be an exit conference with the auditor. The auditor will produce an audit report, called a Statement of Proposed Audit Changes with corresponding workpapers to support the New York sales and use tax assessment. It is advisable to have a sales tax professional present during this meeting as this is your first opportunity to see the auditor’s findings and push back on areas where they have overstepped their bounds or misapplied New York’s sales tax laws.

We recommend businesses refrain from agreeing to the Statement of Proposed Audit Changes, and subsequently the Notice of Determination / Deficiency until a sales tax professional has reviewed it for issues that should be challenged. Many businesses wind up drastically overpaying the state because the business owner or in-house accounting personnel were not well versed in the sales tax laws that, if challenged, could have reduced their New York sales tax liability.

The process of challenging a New York sales tax audit assessment is discussed in detail in the following sections.

New York Sales Tax Audit Protest Flow Chart

NOTE: It is generally advisable to attempt to resolve your New York sales tax audit informally through a conciliation conference. However, if you cannot resolve it through conciliation you still have the option to petition the division of tax appeals.

Contesting Audit Findings with the Auditor

After an audit, the auditor will issue a New York Statement of Proposed Audit Changes (AKA the audit report). This document details the auditor’s findings so it’s important to carefully review and understand its implications. Any issues with the results are handled as follows:

  • Auditee has 30 days to contest findings with the auditor.
    • Documentational issues (exemption certificates, proof tax was paid, etc.) and calculations are worth addressing with the auditor.
    • Legal interpretations of sales tax law are often not resolvable at this stage.
  • If a resolution cannot be reached with the auditor, the next step is to appeal/protest the issue with the New York Department of Taxation and Finance.
Appeal / Protest with the New York Department of Taxation and Finance

Any contested issues that were unresolved prior to the audit report being issued can be protested / appealed by the auditee. This is done after the New York Department of Taxation and Finance issues the Notice of Determination or Notice of Deficiency.

  • A protest / appeal must be done within 90 days of the Notice of Determination / Deficiency (NOD) issuance unless the notice gives a different timeline.
  • You can protest / appeal your New York Sales Tax audit informally with the agency by filing a Request for Conciliation Conference.
  • You can also protest or appeal your New York Sales Tax audit results formally by petitioning directly to the New York Division of Tax Appeals.

If you have received a Notice of Determination and have not at least talked to someone experienced in New York State and Local tax, now is the time before these deadlines are missed.

New York Sales Tax Conciliation Order

If you cannot resolve the New York sales and use tax dispute through the protest / appeal process, the New York Department of Taxation and Finance will issue a Conciliation Order. The Conciliation Order gives you the opportunity to agree or formally appeal the assessment in New York’s tax / administrative court, which is called the New York Division of Tax Appeals. There are important deadlines, such as 90 days to file in a petition with the New York Division of Tax Appeals.

Settling a New York Sales Tax Liability

Along the way, or even after one the critical notices are issued, there is the possibility to settle your New York sales tax case by negotiating with New York Department of Taxation and Finance. Often, you can get better results here than with the auditor. If you or your professional seldom does state and local tax work, it might be difficult to evaluate fair versus unreasonable settlements. DO NOT try to negotiate a settlement without an experienced New York state and local tax lawyer or other professional.

Contest a New York Jeopardy Assessment

New York may issue a Notice of Jeopardy Determination in certain situations. The jeopardy assessment gives New York Department of Taxation and Finance accelerated rights and it may immediately begin to try and collect. Due to the jeopardy nature, the taxpayer only has a short period of time to contest the assessment and must place a security deposit to fight the issue.

New York Administrative Court

If the NOD deadlines are missed, you still have one last shot to fight your New York sales tax assessment by going to New York Division of Tax Appeals. Likewise, and generally not recommended, along the way you always have the option to skip the agency protest and file in administrative court. That said, because neither party wants to spend the time and resources on the uncertainty of administrative court, continuing to challenge the assessment is often an effective way to maximize your settlement potential.

If your case is filed in administrative court, and the case proceeds to hearing, it is heard and decided by a neutral administrative law judge. Our team has handled hundreds of administrative court cases and can help your company receive the resolution it is entitled to. It is very similar to a court hearing and having an experienced representative is imperative.

Other New York Sales Tax Resources

Sales Tax Audit FAQ

  • Q:What triggers a sales tax audit?

    A:You inadvertently waived a red flag or your company landed in the small percentage selected for a random sales tax audit. These red flags include: Cash-based businesses, prior audits that resulted in owed sales tax, your sales reported to the state didn’t match what you reported to the IRS, a high volume of exempt sales, filing a refund claim, or a high number of credits. There’s also a possibility that your business happens to be in an industry that your state suspects rampant under-reporting. Often times, they will target industries effected by complex sales tax laws.

  • Q:How do I prepare for a sales tax audit?

    A:1. RESPOND to the notice; 2. Get organized; 3. Identify/hire your audit manager; 4. Notify your auditor of who they will be corresponding with; 5. Compare your sales tax returns against the federal tax return; 6. Test at least 1 month of exempt sales; 7. Reconcile your sales tax payable account versus your sales tax payments; 8. Review your fixed assets purchased — did you pay sales tax on them?; 9. Review your purchases on your key expense accounts to ensure tax was paid on your purchases.

  • Q:How long do sales tax audits last?

    A:Audit duration can vary dramatically from state to state and from business to business. Waiver issues aside, an audit generally takes 3-7 months to complete. Surprisingly, some audits can drag on for a few years. Time factors usually swing on the size of the company, the ability to produce reliable and organized documentation, and the level of sophistication of the business.

  • Q:Can I do this myself or should I hire a sales tax lawyer or a sales tax consultant?

    A:We all enjoy the occasional DIY project, especially when it saves us money. Before opting to go that route, consider the risk vs. rewards involved. Avalara recently conducted a study and found that the average sales tax audit costs around $115,000. When facing a sales tax audit, it is beneficial to have someone with knowledge of the financial implications on your side. That is where sales tax professionals, such as those at Sales Tax Helper LLC, can save you a lot of heartache and money by avoiding a few missteps. 

  • Q:What accounting software and services do you work with?

    A:TaxJar, Vertex O Series, Avalara, Vertex Cloud, Quickbooks, Proconnect Tax Online, Canopy, ONESOURCE, Sovo Intelligent Compliance Cloud, Intuit Lacerte, CCH SureTax, SS&C Advent Axys, Vertex Payroll Tax Q Series, Bloomberg Tax Advantage, VATBox, CSC Corptax Compliant, Oracle Tax Reporting Cloud, TaxCloud, Fast Enterprises, GenTax, Fast Enterprises FastUI, SAP Tax Compliance, Taxify, and ESKORT Compliance Solution.

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