A recent report warns businesses that states may be looking to bolster their coffers by demanding sales and use taxes from those who do business in the state. Business owners can find themselves facing a New York state tax bill even when they have no physical presence in the state. The state may claim businesses that operate online and sell to New Yorkers are subject to state tax if they meet these criteria:
- Total sales. Cumulative total of sales of tangible personal property over $500,000; and
- Number of transactions. Over 100 transactions over the taxable year in question.
The New York Department of Taxation and Finance provided an example when it cracked down hard on online loan marketplace LendingTree. The state agency argued the business provided a taxable service and claimed it owed the state over $3 million in taxes, penalties, and other fees.
Can the state require businesses pay these taxes?
In some cases, it can. If, for example, it meets the criteria above the business will likely need to pay the tax. But the state does not always win. In the LendingTree case noted above the court disagreed with the state and explained that the business simply matched lenders with borrowers, a practice it did not find qualified as a taxable service. As such, LendingTree did not have to pay the bill.
What can businesses learn from this case?
The state taxing authority is not infallible. Those who are the subject of an audit or if a state taxing authority demands payment can fight back.
How can my business fight back against a tax bill?
Review the state’s case. It is possible that they are incorrect. In the case above, the state erred by claiming that the business’ actions were a taxable event. This is one strategy. Another is to question whether the business meets the two criteria noted above. The attorneys at Goldburd McCone are experienced in sales tax issues and can help navigate these and other strategies to combat the state’s case.
If you believe your business likely owes a state tax it is still important to review the audit. It is possible the agency used a sample period that involved a one-time transaction that was larger than usual and led to an inaccurate estimate of the business’ operations within the state. It is often possible to have this stand alone from the rest of the sample. This can lead to a more realistic estimate of the business’ tax obligations. It is also a good idea to consider requesting abatement. If you can establish the tax was missed by accident instead if intentionally unpaid, the state could reduce the tax assessment.
Can my business proactively reduce exposure to state sales tax obligations?
It is helpful to review business operations. The state taxing agency generally looks to establish a nexus before it can move forward with a state tax bill. This nexus is generally established using the two criteria discussed above.
To clear up any confusion, the experienced tax attorneys at Goldburd McCone LLP can thoroughly analyze how you run your business and determine if you need to pay New York state sales tax obligations.