Many business owners often do not realize that failing to remit sale tax in New York is not just a financial mistake; it can land you in prison. If your business collects sales tax but does not pass it on to the state, you could be charged with criminal tax fraud, face restitution and serve fines, asset seizure or even years behind bars.

As a general matter, the New York sales tax is generally used to fund infrastructure, schools, and many public services. When New York businesses, like bodegas, gas stations, and automotive shops, collect sales tax on behalf of New York state, businesses act as agents of public revenue: a responsibility that New York state does not take lightly.

Once the money is held in trust on behalf of New York state, business owners must promptly remit it to the state when the New York sales tax return is due. Failure to do so can lead to serious criminal implications. In short, holding onto sales tax collected from customers can quickly transform an everyday business into a criminal operation.

A Business’s Duty to Collect and Remit Sales Tax

According to New York Department of Taxation and Finance Publication 750, businesses that sell taxable goods or services in New York must register for sales tax purposes, collect the appropriate sales tax from customers, and remit those funds to the state. If a business sells tangible personal property, provides taxable services, charges admission fees, or operates a lodging facility, it must register and obtain a Certificate of Authority from the New York State Department of Taxation and Finance before making taxable sales.

Once registered, businesses must accurately calculate, collect, and remit the correct sales tax amount. Sales tax collected by a business belongs to the state. Businesses act as trustees, holding the tax in trust until it is remitted to the New York State Department of Taxation and Finance. Depending on the size and structure of the business, sales tax returns must be filed either monthly, quarterly, or annually.

New York Criminal Consequences for Failing to Remit Sales Tax

Some business owners fail to remit the collected tax, either due to financial hardship, oversight, or outright fraud. Under New York law, failing to remit sales tax is a serious offense that can lead to criminal prosecution under the Tax Fraud Act.

New York law explicitly criminalizes failing to remit collected sales tax. N.Y. Tax Law § 1801(5) defines a "tax fraud act" as failing to remit any tax collected in the state's name or on behalf of the state when required under tax law.

The severity of the crime depends on intent, the amount of tax evaded, and the period involved. New York law classifies tax fraud offenses into five degrees, ranging from a misdemeanor for basic violations to a Class B felony for large-scale fraud.

New York Sales Tax Fraud: Resulting in Misdemeanor or Felony

A person commits criminal tax fraud in the fifth degree under N.Y. Tax Law § 1802 when they commit any tax fraud act. This is a Class A misdemeanor, punishable by up to one year in jail and fines. For example, a New York restaurant collects sales tax but accidentally fails to remit it for a few months due to poor bookkeeping. Even though the failure to remit was accidental, this qualifies as criminal tax fraud in the fifth degree.

An individual commits criminal tax fraud in the fourth degree under N.Y. Tax Law § 1803 when they commit a tax fraud act with the intent to evade payment, resulting in more than $3,000 in unpaid tax within one year. This is a Class E felony, punishable by up to four years in prison. For example, a clothing store owner purposely underreports sales to reduce their sales tax bill. Over the year, the New York clothing store owner, with intention, evaded from New York state a total of $5,000 in sales tax.

One commits criminal tax fraud in the third degree under N.Y. Tax Law § 1804 when they fail to remit tax with intent to evade, resulting in more than $10,000 in unpaid tax within one year. This is a Class D felony, punishable by up to seven years in prison. Picture the same example as above, but the amount owed to the state reaches $12,000.

Criminal tax fraud in the second degree under N.Y. Tax Law § 1805 occurs due to failing to remit tax with intent to evade, resulting in more than $50,000 in unpaid tax within one year. This is a Class C felony, punishable by up to fifteen years in prison. For example, a New York car dealership collects sales tax on dozens of transactions but intentionally falsifies records and sales tax filings to avoid paying the state $75,000 in sales tax due over a year.

Committing criminal tax fraud in the first degree under N.Y. Tax Law § 1806 occurs when an individual fails to remit tax with intent to evade, resulting in more than $1 million in unpaid tax within one year. This is a Class B felony, punishable by up to twenty-five years in prison. For example, a large New York retail chain collects sales tax, but intentionally engages in a systematic fraud scheme to underreport transactions, leading to $1.2 million in tax evasion.

The Investigation Process for Sales Tax Fraud

Sales tax fraud cases typically start with an investigation. The Criminal Investigations Division (CID) of the New York State Department of Taxation and Finance is responsible for identifying and prosecuting businesses and individuals who commit tax fraud. According to the Criminal Investigations and Prosecutions of Tax Fraud Cases Guidelines, the state treats deliberate tax fraud cases as a serious offense. It uses both civil and criminal enforcement tools to ensure compliance.

CID investigations often stem from routine audits, whistleblower complaints, discrepancies in tax filings, or red flags in financial transactions. Once a case is flagged, investigators gather evidence to determine whether the failure to remit sales tax was an administrative error or an intentional fraudulent act.

Investigators must consider:

The size of the tax loss
If the loss stems from multiple tax types
The duration of non-compliance
If the fraudulent tax activity occurred with other fraudulent activity
Whether the misconduct involved multiple instances of deception.

Businesses and individuals under investigation may be contacted by CID agents or receive formal notices of investigation. Cooperation at this stage can sometimes lighten penalties, but ignoring an investigation or attempting to cover up financial records will not typically present well for the party under investigation.

If CID determines that a business willfully failed to remit sales tax, the case may be referred for criminal prosecution or prosecutorial recommendation. While the prosecutors ultimately decide whether to bring criminal charges, CID can seek search warrants, conduct interviews, and compel businesses to produce financial records.

If prosecutors move forward with criminal action, business owners and responsible parties may face criminal indictments, asset seizures, and arrests. In some cases, CID works with local district attorneys, the New York Attorney General’s Office, and federal agencies if the fraud involves multi-state or interstate transactions.

New York Sales Tax Fraud in Action

In one of the most high-profile sales tax fraud cases in recent years, Puppy Petite, Inc., a pet store in Brooklyn, was found guilty of failing to remit over $805,000 in collected sales tax between December 2013 and August 2019. Despite collecting sales tax from customers, the business failed to file most of its required sales tax returns during this period. When it did file returns, the amounts reported were grossly underreported.

The business pleaded guilty to criminal tax fraud in the fourth degree after an investigation by the New York State Department of Taxation and Finance. The company was ordered to pay more than $2.1 million in restitution, penalties, and interest.

Another high-profile case involved Anthony C. "Carl" Napolitano, a locksmith from Staten Island who operated under the business name Pop A Lock. Over the course of twelve years, Napolitano stole more than $860,000 in unremitted sales tax.

The case began with a multi-year investigation by the New York State Department of Taxation and Finance’s Criminal Investigations Division, eventually leading to an eleven-count indictment against Napolitano in March 2023. He pleaded guilty to grand larceny in the second degree and criminal tax fraud in the second degree. He now faces up to 30 years in state prison.

Don’t Risk Criminal Prosecution: Get the Sales Tax Help You Need

Failure to remit sales tax is a very serious offense that can lead to criminal prosecution. New York aggressively investigates and prosecutes businesses that collect sales tax but fail to turn it over to the state. The best way to avoid legal trouble is to stay compliant.

If you’re struggling with sales tax compliance, facing an audit, or concerned about past mistakes, don’t wait until it’s too late. Sales Tax Helper provides expert guidance and representation to help businesses resolve tax issues before they escalate into criminal liability. Don’t take risks with your business and your future.

Contact our New York Attorneys today to ensure you stay compliant and avoid the severe consequences of sales tax fraud.

Can Failure to Remit Sales Tax Lead to Criminal Prosecution? The Answer is Yes.