As I’ve received calls from clients who have been hit with large bills for back sales taxes from New York State, it has become evident that the small business community is in need of education on how to comply with sales tax laws.
Apparently, many business owners believe that if they do business in cash, the tax authorities can’t track their sales. Small businesses, especially those who do a lot of cash transactions such as bodegas and restaurants, go out of business all the time because they are assessed large sums of back sales taxes. Either intentionally or because of sloppy accounting practices, many business owners don’t report any number of cash transactions as sales and, therefore, don’t remit the applicable sales tax. Depending on your county in New York, that’s 7% – 9%. Sometimes it takes a few years, but the New York Department of Taxation and Finance usually figures out when it has been stiffed on sales tax. Most business owners who underreport the tax, are not prepared to pay years of back sales tax and are forced to go out of business when they get that bill.
You may ask, how can the state determine a history of cash transactions when the business owner doesn’t even have a record of them? Rest assured, they have their ways. They take averages of similar businesses and impute them to the subject of their investigation and can deduct sales figures based on changes in inventory levels among other metrics. If you think you can outsmart the New York Department of Taxation and Finance, think again. They have an enormous staff and have been doing this for a long time.
Generally speaking, the state is especially merciless about sales tax, more so than income tax, because unlike with income tax, the money you should have to pay that liability was never yours to begin with, it was your customers’, that you merely took custody of for the sole purpose of remitting it to the state. Therefore, if you don’t have the money to pay a sales tax bill, it’s because in the eyes of the state, you stole that money. Nevertheless, depending on your situation, you may be eligible for an installment agreement to pay your bill over time, or an offer-in-compromise, in which case, the state will consider reducing your bill to something you can afford, so that they can get at least something.
This is often what I recommend when I receive a phone call about assessed back sales taxes. Unfortunately, these, like most taxes, are not dischargeable in bankruptcy. I can help negotiate with the state on behalf of my clients to arrive at a manageable solution to the problem. I generally also take the opportunity to evaluate my client’s business practices and make recommendations for recordkeeping improvements. It’s expensive to hire an attorney, let alone pay a large unexpected sales tax bill. Therefore, I often ask clients in this predicament to consider my fee to be an investment in the future of their business, so that they can learn everything they can from the crisis such that it doesn’t happen again.