How to Avoid Exposure to Use Tax Audits
by Brian Gordon, CPA
What is Use Tax?
When sales tax is not charged on a taxable item that you purchase, you may owe "use tax". This can occur if you purchased goods from an out-of-state vendor and the vendor was not required to collect NYS sales tax because they do not have a connection (nexus) with New York. Other times, a local seller may have erroneously thought that the item or service that they sold to you was not subject to sales tax. If sales tax is not charged, and these items are delivered into or used in New York you are required to voluntarily report use tax at the same rate as the sales tax.
Use tax is a very important part of New York Sales Tax audits. You may be vulnerable even if you are not a business that sells goods or services subject to sales tax. Sales tax auditors will examine all of your asset purchases and expense items to see if you paid sales tax when you purchased those items. Very often people and business are not aware of the use tax requirement and do not pay it. They later are surprised to find out on an audit that they owe a significant amount of use tax, plus interest and penalties. This large failure to voluntarily report use tax led to new state laws requiring large internet companies to collect sales tax on behalf of the state their customers live in.
You should review your own purchase records to determine your exposure to use tax audits, or engage a sales tax consultant such as State Tax Audit Representation. We may even find that you paid sales tax on nontaxable goods or services and are entitled to a refund. This is known as a “reverse audit”.
Correcting errors now, or at least reporting properly on a going forward basis will eliminate interest and penalties if you are audited by the NYS Tax Department.
If your business does not sell goods or services subject to sales tax, you should register and file sales tax returns regardless, to report any use tax that you may owe. Even if you feel you owe zero use tax in a particular period, filing returns limits the statute of limitations to three years from the date of filing. If you don’t file, there is no limitation. The NYS Tax Department would likely look back six years in the case of non-filing.
If you would like more information on Sales and Use Tax, or need help with a Sales and Use Tax Audit, please feel free to contact Brian Gordon at 516-510-6041 or email at BGordon@StateTaxAuditRep.com
Brian Gordon Bio: Brian Gordon, CPA, is the owner of State Tax Audit Representation, Inc. He represents clients on State and City tax audits and collection matters involving Residency, Sales Tax, Corporation Tax and any other state and local tax type. He also works on IRS audits and collection matters. Previously, Brian was with NYS Department of Taxation and Finance for many years as Manager of the New York Metropolitan District where he worked on many high net worth tax audits of all types. Following his government experience, he was State and Local Tax Director, most recently at Gettry Marcus, CPA, PC. Brian is a member of the NYSSCPA New York, Multistate & Local Taxation Committee, and former President of the NYSSCPA Queens/Brooklyn Chapter. He writes and speaks on various state and local tax issues. He can be reached at 516-510-6041, or by email at bgordon@StateTaxAuditRep.com.