New york sales tax audit manual

A company may not be aware of internal policies establishing the amount of tax that can be conceded by the auditor or the supervisor to secure a fully agreed case. If the actual sales and use tax audit results in significant proposed liabilities, then you may be compelled to now engage an external professional representative.

There are many potential challenges to overcome at this point in the audit:. The following are some best practices to consider when going through the sales and use tax audit process:. The sales and use tax audit process is not an ordinary occurrence. Our team has deep experience in assisting companies undergoing state sales and use tax audits as well as conducting overpayment reviews. Learn more about our sales and use tax audit services on our audit and accounting services web page.

Financial Services Fintech Governments Healthcare. Diversity, equity and inclusion Living our values Locations Logo and trademark. Wipfli's History Leadership Team. Diversity, equity and inclusion Experienced professionals. How we invest in your growth Virtual recruiting. Open positions Alumni Bridge. How to prepare for and handle the sales tax audit process Dec 02, By: Keela Ross. What you need to know about sales and use tax audit procedures Each state is different in the way they conduct their audits so it is important to be aware of the audit procedures and scope of the audit from the very beginning.

How to handle proposed adjustments after sales and use tax audit If the actual sales and use tax audit results in significant proposed liabilities, then you may be compelled to now engage an external professional representative.

There are many potential challenges to overcome at this point in the audit: The auditor believes the audit is complete and may be reluctant to invest more time to address the issues. The auditor might have made concessions during the discussions about the questioned transactions that may not be documented in the report detail.

The external representative may not be aware of those discussions. The external representative may identify new or additional facts that were not presented to the auditor or were not entirely accurate explanations. This booklet was written to give you an overview of the audit process and its legal foundations. We hope you find it helpful. The information is intended to be very general. We will be happy to answer your questions. Every business has to worry about sales tax compliance, no exceptions.

Even tax-exempt organizations charities, religious organization, etc. We find New York sales tax audits to be among the most challenging because sales tax is one of the most aggressive taxes administered by the state. This aggressiveness stems from five issues that often arise during a sales and use tax audit:.

Personal Liability: sales tax is a trust-fund tax. That means businesses hold the tax in trust for the state until it is remitted with a return. Because of its trust-fund nature, sales tax is one of the few taxes that can lead to personal liability for those individuals who are responsible for running the business.

There are many ways New York State identifies businesses to audit. Random audits are becoming less and less frequent.

This situation usually leads to an audit of the seller. The Tax Department also utilizes technology to identify audit targets. The Tax Department maintains a highly sophisticated software program called CISS Case Identification and Selection System that analyzes information from various sources to find inconsistencies requiring additional investigation. The software runs the following analyses:.

The Tax Department has indicated that CISS can run over 14, separate processes to analyze financial information and tax returns. Wayfair, states may require an out-of-state business to collect and remit their sales taxes so long as the business has a sufficient economic presence or nexus in the state; actual physical presence in the state is no longer required.

Many other states have passed similar laws or rules, including New York. According to a Notice issued in January, , out-of-state vendors with no physical presence in New York will still have to collect and remit sales tax on sales to New York customers if, during the immediately preceding four sales tax quarters:.

This rule was first articulated in a Notice published on January 15, However, because the Notice is based on provisions of the Tax Law that have been around for many years, the Tax Department has indicated that it is not required to apply this rule prospectively only.

It may, in certain circumstances, seek to apply the rule retroactively to the date the Wayfair case was decided June 21, It seems highly unlikely that the Tax Department could legally apply the rule to a date prior to the Wayfair decision. Thus, out-of state service providers with no physical presence in the state have a reasonable legal position that they are under no legal obligation to collect and remit New York tax. For example, if a New York customer purchases a taxable information service from a seller located exclusively out-of-state, the service provider appears to be able to sell the service without collecting and remitting the New York tax of course, the customer has an obligation to pay use tax on the transaction.

But a word of caution is in order. Moreover, software is invariably used in conjunction with online services for example, remote payroll processing, inventory tracking, business data management, etc. Thus, any service that utilizes software that the customer accesses could allow the Tax Department to argue that it is taxing a sale of software tangible personal property and not the sale of a service. The items I sell typically cost a couple hundred thousand dollars and up.

But I only hold auctions sporadically throughout the year and have customers located across the country. In a given year I might make 50 sales to New York customers, the total amount of which will exceed several million dollars. This makes New York and Connecticut outliers. The transaction occurs when either there is a transfer of title or possession or both of tangible personal property, or when a service is rendered.

The location of the change of possession or the rendering of the service determines both the incident and rate of tax. Thus, if a customer takes possession of the material in New York State, the tax is due at that point, at the rate set for the locality where the change in possession occurred.

Consequently, sales to customers outside New York State where the customers take possession outside the state are not subject to New York sales tax. The Desk Audit tends to be more limited in scope and usually focuses on a particular transaction e.

Customs, the bulk sale of assets of a business, etc. The Field Audit tends to be a more expansive review of every aspect of the sales and use tax compliance of a business.

This booklet will focus primarily on the issues that arise in a Field Audit. The audit generally begins with a packet of material that arrives in the mail from the Tax Department.

This packet contains several items, including:. The initial audit letter sets a date for the auditor to arrive at the business to conduct the field audit and the initial IDR contains a laundry list of documentation that must be provided at this visit.

In practice, however, audits rarely unfold so neatly. The list of requested documents is voluminous and it could take months to compile the requested information. Further, the audit date may not work for the business.

Normally, the best approach, after the commencement of the audit, is to contact the auditor,18 go through the laundry list of requested documentation, and discuss what is needed at the initial meeting to get the audit underway. In most audits, auditors do not review many of the records requested in the initial request letter. For example, we have yet to provide a corporate minute book in a sales tax audit. This initial conversation can streamline the audit process and save your business and the Tax Department significant time and effort.

The conversation usually results in a mutually agreed upon date for the initial audit meeting, and a more manageable list of records that must be provided. Just about every sales tax audit examines four key areas: 1 tax reconciliation, 2 sales, 3 recurring expense purchases, and 4 capital purchases. Below is a description of each section of the audit. Initially, the auditor needs to verify that every single dollar of tax collected by the business was remitted on the sales tax returns of the business.

Normally, the auditor can resolve this issue by reviewing the tax returns and the vendor's sales tax accrual account to determine whether the numbers match up. This initial aspect of the audit is fairly straightforward and usually resolved during the first audit meeting.

The types of records that will be reviewed will depend on how the business operates. For example, cash businesses such as bars and restaurants will be required to produce daily, transaction-by-transaction cash register tapes not just the nightly summaries or point-of-sale data if the business utilizes a computerized sales system for the test period.

Businesses that bill customers for payment will have to provide general ledger accounts detailing the sales transactions and copies of corresponding contracts and invoices. The review of sales is designed to ensure that the business is reporting all taxable sales made during the audit period and to confirm that the tax is being calculated correctly on all sales.

Though the business can require the auditor to review every sales transaction that occurred during the audit period, it is usually preferable to allow the auditor to review a test period typically a quarter during the audit period and then extrapolate any liability found during the test period to the rest of the audit period. This approach can dramatically shorten the duration of the audit by limiting the number of issues that need to be discussed.

This form confirms that the taxpayer has consented to the use of the test period methodology, though it does not obligate the business to accept the audit results. Auditors are instructed to choose a test period that seems representative for the audit period as a whole. If it does not, the business can challenge the audit results.

For example, if the sales of a business are seasonal, a test period from the busy season would result in an inaccurate estimate. Another possibility is that an unusual transaction might occur in a test period that does not occur elsewhere during the audit. Such transactions require either a separate, special extrapolation, or removal from the test period altogether. Generally speaking, it is best for the business for the test period to be as representative as possible i.

Keep in mind that the amount of sales in the test period may not be a good indicator of the eventual liability. Some businesses incorrectly assume that the higher the sales volume, the higher the eventual liability, and the lower the sales volume, the lower the eventual liability. In fact, the opposite can be true. For example, a test period with high sales volume and few errors can create excellent audit results, whereas a test period with low sales volume and many errors will likely result in a high audit liability.

The taxpayer is then afforded the opportunity to review these transactions to demonstrate either that tax was not due or that tax was, in fact, remitted to the state. Every transaction that is removed from this list reduces the ultimate liability of the business. Once the exception list is set, or if the parties cannot agree on all of the transactions contained on the list this happens in disagreed audits where the vendor will appeal the audit results , the auditor will take the liability found during the test period and extrapolate it to the rest of the audit period to determine the total sales liability due.

Auditors can use different extrapolation methodologies to arrive at the final liability total. Sales of milk, juice, fruit, and yogurt, for example, are exempt from tax. He even went so far as to argue that a tax assessment is presumed to be correct and that without proper documentation, the taxpayer could not rebut that presumption.

Consequently, he canceled the sales tax assessments against the store and its owner. The takeaway from this case, and others like it [ In re Restaurant, Inc. Good recordkeeping practices are essential to running a healthy and profitable business, but even businesses with bad recordkeeping practices have rights and defenses that can be used to protect against overzealous—if well-intentioned—auditors. Facebook Twitter Linkedin Youtube. By Corey L. Rosenthal, JD and Lance E.

Featured , Columns , March Issue April Get Copyright Permission. A New York sales tax audit can be a grueling experience. Indirec Audit Methods Must Be Reasonable Once a taxpayer is determined to have inadequate records, auditors are granted considerable latitude in selecting an indirect audit methodology. Corey L. Lance E. The Risks of Fraud Collusion. Related posts. Accounting for Operating Leases. A New Approach to Finally…. How ASU Changed the….