2016-10-05 / Front Page

QCC Breakfast Holds Meeting On NY Sales Taxes

By Thomas Cogan
The Queens Chamber of Commerce held one of its Breakfast Before Business meetings last week, welcoming speakers from the Manhattan accountancy, CohnReznik LLP, who talked to attending businesspersons about sales and use taxes in New York state.  That would seem to be a topic only accountants and businesspersons, and only with great effort, could find interesting.  In fact, a consideration of the way such taxes affect us in most of the United States can be highly interesting.   To those who are in business, it’s not merely interesting but vitally important they pay attention to these taxes because New York state does and expects its taxpayers to do the same.

 Corey Rosenthal, principal of CohnReznik, was the first to address the businesspersons in attendance.  He said a sales tax is a nuisance tax, one that companies wrestle with.  But nuisance though it may be, it is serious.  Most taxation comes not from income but from property, sales and use taxes, the latter two having a close relationship.  Forty-five states and the District of Columbia have sales taxes, the five non-conformists forming the acronym, NOMAD:  New Hampshire; Oregon; Montana; Alaska; and Delaware. By contrast, in New York, state or city, assume a sales tax, and frequently.

Services that are subject to a sales tax in New York include utilities, printed information and landscaping, to name some commonly used ones.  There are certain sales taxes for certain trades, such as construction, building ownership, manufacturing, technology and restaurants (the “hot dog tax”).  Contractors might be subject to one of them too, though capital improvements would exempt them. 

A capital improvement is a repair or alteration whose removal would be critically effective, possibly rendering the project futile.  Something built from the ground up is generally not taxed, but a surface “fixer upper” or beautification is likely to be.  Fixing a leak in the roof is not a capital improvement; replacing the entire roof is, and also replacing an entire bathroom, rather than simply replacing a sink or toilet.

 A capital improvement is “intended to be permanent,” Rosenthal said, proceeding to an anecdote.  When the current Madison Square Garden was redone, the owners claimed the new scoreboard was a capital improvement, saying any scoreboard is vital to the life of an arena and the old scoreboard absolutely had to be replaced.  Long negotiations ensued before the scoreboard was indeed declared a capital improvement, thus exempt from a huge tax.

One might argue that trash removal is similarly vital and thus exempt, but it isn’t.  That even applies, much of the time anyway, to asbestos removal.  If such removal is a massive project involving great displacement, it could be a capital improvement; but uncovering a few pipes or taking away some old insulation by vacuum suction does not qualify.  But go figure:  interior design is considered a capital improvement in the city of New York.   

Rosenthal turned the talk over to Arvi Kaur, a manager, who made an  examination of three industries:  restaurants, manufacturing and technology.  Restaurants, she began, are exempt on purchase of inventory.  Groceries purchased are not sales taxed until sold to customers, who inevitably get the pass-along.  Napkins are taxable but containers for take-out drinks are exempt.  Cleaning is taxable, accounting is exempt. 

This latter exemption serves as a warning that records had better be kept, and the longer kept the better.  If only recent records are kept while older ones are discarded, the state can extrapolate to determine what the older ones in all likelihood said.  Kaur said it’s a three-year minimum on record-keeping, though in some instances the state can demand up to 10.  Guest checks and bank statements are among the required records.

Gratuities are not taxable if voluntary, but mandatory ones can be.  Gratuities identified as such (the 15 percent notice, say) are exempt.  If the restaurant exacts a charge for employees’ meals, a pro-rated sales tax obtains.  The use tax descends on items bought out of state, to be charged in the state where used—particularly if that state is New York, which, according to an anecdote by Kaur, dispatches agents to check auto licenses in the parking lots of Ikea stores in New Jersey.

In manufacturing, purchasing and distribution of products involve sales and use taxes.  Exemption from them in production depends on being part of the production  phase or not.  Manufacturing means transformation of purchased ingredients. Processing is a change of nature, generated by natural or chemical means.  Assembling is fitting various parts, leading to completed products.  Big machinery used necessarily in production tends to be tax-exempt also.  Computer equipment might be exempt too, but again, it must be vital to the production process.

The product sales phase has its hazards, though.  Price-gouging to absorb the sales tax expense could be detected in an audit.  Such a discovery could mean that items priced at $100 but sold at $125 would be subject to taxation at the higher price.  Also, using the state’s tax money as revenue before submitting it at month’s end can be detected in an audit, with similarly severe consequences.

In technology, off-the-shelf software is taxable, unique use software (customized) is exempt, though matters could get exotic, Rosenthal warned.  Maintenance contracts are usually exempt.

CohnReznick Senior Manager Richard R. Persaud concluded the meeting with another warning.  Auditing in New York is “on the rise.”  Sales tax is a fiduciary responsibility and auditors are its police officers.  Should it come to malfeasance, officials and employees of companies under examination are responsible all the way down the chain, from chief financial officer (or higher) to bookkeepers. 

Just keep in mind those dauntless agents headed for Ikea parking lots in states neighboring New York.

   

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