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NY Sales Tax Audit Terms

In a recent post, we discussed the sales tax audit procedure here in the State of New York. As we saw, the NY sales tax audit process is complex. If you find yourself saddled with an audit, you will almost certainly need to obtain a qualified tax attorney. Navigating the audit process by yourself is usually too much to handle for the typical businessperson. In this post, we thought we’d give a bit more background information on this process by discussing some terminology which relates to sales tax and sales tax audits. Understanding these terms may contribute to a better overall understanding of the sales tax audit process. In any case, business people are very likely to come across these terms at some point and so understanding them should always be useful. Let’s explore a few terms in detail.

Nexus 

Nexus is often a key area of concern in a sales tax audit. It refers to the connection between a tax jurisdiction and an entity that justifies imposition of the tax. In other words, an entity needs to have a sufficient connection to a jurisdiction before that jurisdiction can impose a tax on it. This requirement stems from the U.S. Constitution. Historically, nexus was primarily based of the physical presence of an entity in a jurisdiction. However, in South Dakota v. Wayfair, the Supreme Court eliminated physical presence as an indispensable element of nexus. Physical presence is still a factor in the context of nexus analyses, but is no longer a necessary requirement. Nexus is a recurring issue in tax law in light of the rise of online businesses such as Amazon.

Remittance 

Remittance refers to the process of sending money to satisfy an obligation and the amount of money being sent. In other words, the term encompasses both of these separate things. Remittance is commonly used in the context of sales tax enforcement. That’s because this tax is collected and then must be “remitted” to the state. Hence, in a sales tax audit, the subject of the audit will often have failed to remit the assessed sales tax amount. 

Sales Tax 

Also referred to as “sellers use tax,” sales tax is a type of transactional tax imposed on retail goods and services. Sales tax is one of the most common types of excise tax. The applicable tax rate varies widely according to jurisdiction. Sales tax is often both a state level and local level taxation. In New York State, for instance, there is a statewide sales tax and then additional local sales taxes.

A few states, such as Oregon, do not have a statewide sales tax. Sales tax is paid by a consumer and sent to the state on a recurring basis. In other words, businesses do not pay the tax. Rather, they collect the tax payment made by the consumer and forward it to the state.  A sales tax audit, then, usually involves a comparison of a business’s sales and the amounts forwarded to the state for the sales tax audit period.

Use Tax 

Like sales tax, use tax is a type of transactional tax on certain goods and services. However, unlike sales tax, use tax is not automatically collected by the retailer in a given transaction. In most cases, use tax applies to purchases of out-of-state goods by in-state buyers. Consider an example. A citizen of New York State goes out-of-state to New Jersey to purchase an old automobile in a private transaction. When the New Yorker returns to his or her home state, a use tax will be due. The use tax is meant to provide financial balance to the state. The resident buyer gains the benefits of the state’s infrastructure, and the extra tax is meant to provide compensation for this benefit. What’s more, the use tax provides a balance for in-state and out-of-state purchases. 

Tax Jurisdiction 

Tax jurisdiction refers to an area that has its own defined tax rate. In other words, the tax rate within a tax jurisdiction does not apply beyond the geographical boundaries of that jurisdiction. Tax jurisdictions are commonly follow county, parish, municipality or city lines. Tax jurisdictions not only have their own rates, they also have their own regulations and requirements. Business people need to be familiar with the rates and regulations which apply to their particular jurisdiction. When a multiple location business faces a sales tax audit, it’s not unusual for multiple sales tax rates to apply.

Voluntary Disclosure Agreement 

Voluntary Disclosure Agreements (VDAs) are programs intended to promote better sales tax compliance and provide certain benefits to businesses. If a business has fallen behind on compliance, a VDA will provide a number of benefits and make things easier for the business to get on track. Typically, VDAs are not available to businesses which have filed sales taxes in the past, but only for those businesses which are new and have yet to file. New businesses often struggle to complex with sales tax regulations and so VDAs account for this reality. In a VDA, a business discloses its past sales tax liabilities to its corresponding tax authority. In exchange, VDAs generally provides some anonymity, a shorter look back window, penalty waivers, and other benefits as well. Significantly, however, VDAs are not available to a taxpayer once a sales tax audit has begun.

Sales Tax Audit Help

Hopefully, these terms can aid our clients as they grapple with their sales tax requirements. At Mackay, Caswell & Callahan, P.C., we strive to bring our clients quality material on a regular basis. The more education we can provide, the better our clients will be able to craft a strong financial future. MCC covers a variety of tax law issues, including New York sales tax audits, Offers in Compromise, installment payment agreements, 1031 exchanges and others. If you have a tax law issue and need assistance, reach out to one of our top New York City tax attorneys today.

Image credit: Tim Reckmann