Articles Posted in Sales Taxes

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The legal term responsible party for NYS sales tax purposes often arises when a sales tax obligation is not paid, and the State of New York is attempting to hold a person other than the company liable for the unpaid sales tax. The legal term itself, under NYS tax law, relates to defining an individual or group of individuals who have a level of control over the assets of the entity. Typically, this would either be an owner of the company or an officer/ managing member of the company (or LLC). Therefore, the logic is that since they made the financial decisions of the company, they should be liable when those debts are not paid.

Under NYS Tax Law a responsible person is jointly liable (with the company) for the unpaid sales tax owed (or any of the business’s other responsible persons).

In the case of a partnership or LLC, section 1131(1) of the NYS Tax Law provides that each partner or member is a responsible person regardless of whether the partner or member is under a duty to act on behalf of the partnership or LLC entity. This means that these persons can be held responsible for 100% of the sales and use tax liability of a business in addition to the company. The New York State Tax Department recognizes that this situation can result in severe consequences for certain partners who have no involvement or control of the business’s financial issues. Accordingly, the NYS Tax Department has developed a policy that gives some protection from per se personal liability for unpaid sales taxes for certain limited partners and members of the LLC.

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New York Tax Law provides a three-year statute of limitations on the Tax Department’s right to assert additional tax due. In general, the three-year statute of limitations clock begins to run on the date the tax return is filed. After the three years, the Department may not assess any tax above what the taxpayer reported on their tax return. A longer statute of limitation applies to discourage avoidance practices. A six-year statute of limitations applies to abusive tax avoidance transactions, etc.

The statute of limitations may be extended, by written consent from the taxpayer prior to the expiration of the statute of limitations. Extensions may be granted multiple times. If the taxpayer consents to an extension in writing, the period for filing an application for a credit or a refund is extended and shall not expire prior to six months after the extended date has expired. This most often happens when a tax audit is in progress.

It is important to note that the statute of limitations does not apply to any period where the taxpayer did not file a return, failed to report changes made to a federal return, or filed a false or fraudulent return to evade tax. For income tax purposes, a taxpayer is generally required to report changes to their federal return to New York within 90 days after the final determination of the change by the IRS.

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In a recessed economy — or even a recovering one — it may make sense that lawmakers are exploring additional sources of tax revenue. The latest frontier is commonly referred to as the Internet sales tax.

Under current law, online businesses may only be required to collect tax in the states where they have their headquarters, supply warehouses or other type of physical presence. However, the U.S. Senate recently approved a bill that would allow states to impose sales tax on online retailers. For New York business owners, the change could potentially create a big administrative hassle and give rise to tax investigations or disputes.

New York lawmakers already require Internet sellers with an in-state affiliate to collect these taxes. Under the proposed legislation, states where an Internet retailer makes sales over $1 million would be fair game for the collection of sales taxes.

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If your business is selected for a sales tax audit, the New York State Department of Taxation and Finance will try to prove that the business owes additional taxes. This process is long, and requires that the department audits have access to all of the financial records for the business to calculate any back sales taxes owed.

There are multiple reasons why your business was chosen. New York State Sales and Use Tax audits can occur for multiple reasons such as:

  • You might have underpaid your taxes

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Tax debt issues are very difficult for all taxpayers, but these issues are magnified when it comes to a business tax debt. One of the biggest tax problems that businesses of any size can face is having a sales tax audit. Once notification of a sales tax audit is received, it causes a great deal of concern and disruption to the business. It is also a tax matter that is best dealt with the help of an experienced tax professional, such as a tax attorney, because of the monetary repercussions that can result from a tax audit.

The reason that it is more difficult for the small to medium businesses to handle their sales tax responsibilities is because they often do not have an accounting staff dedicated to the accounting function. This means that on top of all the other responsibilities of running a business, the owner has to fulfill the task of proper collection, record keeping and filing of the sales taxes. This leaves potential for error. These errors can result in a sales tax being owed that now creates even greater hardship on the owner. When a sales tax audit is going to be conducted you need to have the correct answers to questions that are going to arise. You need to be organized and have the time available to spend with the auditor. This is not easy when you are trying to operate a business, and audits can often be long and drawn out. A tax attorney will help review all of the documentation to determine if there is anything is out of order and could have created the cause of the audit. If something should surface, the tax attorney will know what the necessary steps are to rectify the situation and handle it for you.

For instance, we recently helped a small business owner who after an audit was assessed for $60,000 on estimated sales tax owed. We went through the details and used the actual sales data to come up with the correct number. After proving that our number was documented based on the sales tax data provided to the state, we were able to reduce the amount owed down to $8,000 by reviewing all the accounting records with the sales tax auditor.

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