Brian Gordon, CPA, is the Director of State and Local Taxes at Sanders Thaler Viola & Katz, LLP. Previously, Brian was with the NYS Department of Taxation and Finance as the District Audit Manager in Manhattan and Brooklyn. He is a member of the NYSSCPA New York, Multistate & Local Taxation Committee and writes and speaks on various tax issues. He can be reached at 516-704-7130 or 516-510-6041 and email: bgordon@st-cpas.com.

STVK in the News

Sales Tax Audit Success

Brian Gordon just closed a Sales Tax Audit of a fitness club in New York City. Similar businesses are subject to New York City Sales Tax at the rate of 4.5 percent of sales. Brian was able to present facts relevant to this business and, as a result, saved the client approximately $200,000, which was about 50 percent of the potential liability.

Brian has had outstanding results with regard to Sales and Use Tax audits. As a former New York State Department of Taxation and Finance District Audit Manager for the Metropolitan District, Brian has accumulated the experience to represent clients on audits to achieve the best possible results.

If you have problems with sales tax, residency audits or any state and local tax problem, feel free to call Brian Gordon at 516-938-5219.

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News and Technical Information

What is Click-Through Nexus for Sales Tax?

Also known as “The Amazon Law” (after internet trendsetter Amazon.com), click-through nexus laws clarify that the solicitation of business by placing a link on someone’s website in another state that connects a potential customer to your website may create a sales tax filing obligation for you in that “foreign” state. In order to eliminate forcing this requirement on smaller business, most states include a $10,000 threshold for sales in the preceding year resulting from these click-throughs. Be careful, though, if you are a multi-state business as the threshold for the following states are less: Rhode Island, Connecticut and Pennsylvania ($0). About half of all states have now either passed click-through laws or follow them as policy.

You might ask what happened to the requirement of physical presence in a state to create nexus as established in the Supreme Court decision in the Quill case. In response, some states might argue that a link already qualifies as physical presence. For example, New York State law always provided that nexus includes physical presence of employees, independent contractors, agents or other representatives soliciting business in New York State. Placing a link on a website that connects to your website is the modern equivalent of this example – an agent or representative soliciting business for you. New York’s law, as well as the law in many other states, includes a presumption that the agent or representative is soliciting for you. This is a rebuttable presumption, however, which means that if the only activity in New York is the link and the agent does not engage in any solicitation on behalf of the out of state seller, the nexus rule can be challenged. Most states with Amazon Laws have this rebuttable presumption. However, Connecticut’s law is irrefutable.

Additionally, the law in Illinois was challenged in the Illinois Supreme Court and it was found that the click-through law was not permitted as it was preempted by the Internet Tax Freedom Act and it discriminated against the use of internet. In response, Illinois amended their law to include both tangible and electronic means of referring sales. The click-through law is once again active in Illinois.

Do the click-through laws pertain to Corporation taxes? While you never know what a particular state will propose, the click-through nexus laws are specific to sales tax. Many states have also created new corporation nexus laws based on the amount of sales in that state with no physical presence required. States have become aggressive in writing new laws to attach new taxpayers to their state. If you have any questions regarding nexus or filing requirements in any state, please call me, Brian Gordon, at 516-938-5219 for information.

How NOT to handle a NYS Sales Tax Audit

As you scan the recent New York State Administrative Law Judge (ALJ) court determinations, it seems that there will always be cases involving sales tax audits of cash businesses. These include delis, salad bars or restaurants, and a common theme is that the business does not have complete records. A commonly omitted item is cash register tapes. It is very important to handle these audits properly, as it is very difficult for a taxpayer to win this type of case in court.

Over a period of many years, cases have gone to ALJ hearings and many of those have been advanced to the New York State Tax Tribunal. The decisions by the Tribunal set a precedence for future audit treatment. As such, it has been determined that, if your records are inadequate, the auditor is allowed to use indirect methods to estimate the amount that your actual taxable sales should have been and then calculate the sales tax due per audit. Indirect methods may include:

Conducting an observation of the business

Using published business ratios

Mark-up methodology

The difficulty in fighting these cases in court is that in using these indirect methods, the auditor doesn’t have to prove that the result is accurate.

It has been established in past Tribunal Cases:

“…The Division’s method must be reasonably calculated - exactness is not required.”

“In addressing the method of audit, considerable latitude is given to an auditor’s method”.

You can see what we‘re up against. The auditor doesn’t even have to be correct. Considerable latitude is given and the method must only be reasonable. This seems harsh, but don’t forget that the business owner is required to keep records. When presented with incomplete records, the auditor has no other option than to use estimates.

The Tribunal has also established that: “The burden is then on the taxpayer to demonstrate, by clear and convincing evidence, that the audit method was unreasonable”. This is how you can win, but it is a steep climb.

In a recent case, affidavits were submitted in lieu of records. The taxpayer’s representative rebutted the auditor’s findings with alternative estimates. That strategy doesn’t work because the requirement of the taxpayer is to produce records that will show that the sales were correctly reported. If you don’t produce records, the auditor is allowed to estimate – you are not allowed to. The aforemention taxpayer lost their case and, what makes matters worse is, there were substantial penalties added to the tax.

If you have a Sales Tax problem, I’d be happy to help you. Please call 516-938-5219 to speak with me.

For more information regarding State and Local Taxes, please visit
Brian Gordon's S.A.L.T Blog at:
www.st-cpas.com/blog.