Over the past decade or so, many state tax and revenue departments, including the New York Department of Tax & Finance (the NYDTF), have significantly increased their sales tax audits on industries like convenience stores and gas stations. The industry has been largely seen as a notorious under-reporter for New York sales tax. This article was drafted to assist New York gas station and convenience store owners to understand the source of their audit risk, what they can anticipate during a sales tax audit and offer some tricks to reduce their audit risk. For those currently under audit, hopefully this article will provide information essential for fighting an assessment.
Using Third-Party Data from Beer and Tobacco Distributors to Find Sales Tax Audit Candidates
Like private industry, state revenue agencies have also leveraged technology to select and conduct audits more efficiently. For example, New York is already privy to sales made by alcoholic beverage and tobacco distributors to its retailers, many of which are convenience stores and gas stations. The NYDTF can easily use that data to estimate sales of those retailers. Of course, the model estimates high and creates an easy check for the state to systematically identify and target gas stations and c-stores that may have under reported their state sales tax.
The model is straightforward. New York has the beer, cigarette and tobacco purchases, so it can easily apply a markup to those sales to approximate beer and cigarette sales. Once beer and cigarette (ABT) sales, there Is data the state relies on to estimate non-ABT sales, such as grocery items, water, soda, and snacks. Now that it has total sales, the state can back out a “normal” exempt sales rate and determine a range of taxable sales based solely on ABT purchases. After running a quick report, the state can easily determine retailers outside of the projected range, making them prime candidates for New York sales tax audits.
As mentioned above, the model created by the state revenue agencies is designed to estimate higher than actual sales. It should also come as no surprise that the ABT data, which serves as a backbone for the entire audit is often flawed and contains errors, which could also act to inflate the assessment. Further, each and every New York gas station or c-store has its own story that does not fit neatly into the average model.
Strategies for Lowering the Risk of a Sales and Use Tax Audit from ABT Purchases
An obvious defense to the aggressive state tactics is to prevent the audit in the first place. The entire model is premised on the retailer’s ABT purchases, which the state has from distributor reporting. But, if the state has these purchase records, you do too.
Review your ABT purchase records to ensure they are accurate. For example, purchasing non-ABT items from these vendors can inflate the reports. Above all, your reported sales should at least cover the beer and cigarette purchases with a reasonable markup. Over the years, it never ceases to amaze us the number of audits we handle in which the retailer’s reported total sales do not even cover their ABT purchases.
Ideally, reported sales for C-stores and gas stations should at least cover both ABT sales and some non-ABT sales as well. There is no substitute for accurate reporting to deter audit selection by the NYDTF.
Many businesses in the gas and convenience industry also violate the cardinal rules of sales tax—ensuring their monthly sales tax returns are in line with their reported sales on their federal and state income tax returns. Discrepancies between these tax returns can easily flag you for audit. A final issue that can create problems for some gas stations is the reporting of abnormally high exempt sales for their industry, which is always an audit red flag. Review your inventory and confirm items are accurately labeled as taxable or exempt. Food and beverage items are often a major culprit for this issue because of their confusing rules that can arbitrarily make them subject to sales tax or not.
What to Do If Selected for an Audit
If you or your client’s business is the lucky recipient of a sales tax audit, there are steps that may be available to reduce the New York sales tax liability. Because the model is premised on purchases and estimates, you can evaluate each estimate to see which step could reduce your liability.
- Review ABT purchase data. By now you are an expert on the ABT purchases data that’s used for your assessment. There are often errors in the reports, such as inclusion of non-beer and tobacco sales. You should review your purchase history to ensure the reports are accurate as it serves as the foundation for the entire calculation.
- Compile and determine favorable markup percentages. The Department also uses estimated markups based on industry averages. Your business is unique, and there could be items that are sold below industry averages. Those should be provided as there is no harm in presenting your business in a favorable light.
- Be careful on providing non-ABT sales. The NYDTF already knows your beer and cigarette sales and has estimates on other sales. For the assessment to be the smallest, you would prefer to have lower non-ABT sales to increase total sales. Be careful on overproviding non-ABT sales as it may increase, rather than decrease the assessment.
- Determine the percentage of ABT sales that comprises total sales. Most models account for about 50 percent of ABT sales compared to total sales. Many businesses try to decrease this percentage. However, the reality isa higher percentage of ABT sales can decrease the assessment, which may be counterintuitive.
- Determine exempt sales. Does your business have some unique aspect that justifies a high exempt sales ratio? Typically stores that sell a high amount of grocery items or receive food stamps will have a higher exempt ratio, which can reduce the assessment. It can be tough to balance higher exempt ratios, without lowering your ABT percentage. It is critical to understand the big picture to ensure the sales tax liability is minimized.
Typically, every store has favorable numbers for one of these variables. Figure out which benefits your business. Most states require businesses to provide records during an audit, but make sure your disclosures fairly present business’s tax liability and do not lead to unfavorably assumptions that generate overassessments.
Appealing the Results of a Sales Tax Audit in New York
Many sales tax issues cannot get resolved on audit. Auditors only have limited resolution authority and often stick to the model irrespective of what is provided by the taxpayer. If you cannot get the audit resolved, a Notice of Determination (NOD) will be issued.
An NOD is not the end of the road as a taxpayer. Once that notice is issued, you have 90 days to file an appeal through New York’s conciliation process. The Department has more settlement authority at this level, and it is often a better venue for sales tax resolution.
From there, if the case is still not resolved, you have another opportunity to appeal to the Tax Tribunal. This step operates more like an administrative court with greater formalities and procedure. Again, the agency has even more settlement latitude compared to the auditor and cases often get resolved at this level.
Because of the nuances and the challenges that present themselves at each round of appeal, it is critical to have a sales tax attorney or another professional assist you along the way.
Conclusion
In summary, it is critical for gas stations, convenience stores, and small grocery stores to know and understand what can trigger a New York Sales tax audit. Having adequate sales tax representation from a sales tax lawyer or other professional is crucial to resolve your case. As you can tell, there are tricks and best practices at each step along the way that could affect the outcome of your assessment. Our team of sales tax professionals have vigorously defended thousands of clients in sales tax audits, appeals, and litigation.