Frequently Asked Questions

1. Why am I being audited?
There are a number of reasons your business could have been chosen for a New York State Sales and Use Tax audit. Such reasons could include any the following: 1) your business was randomly chosen by the Tax Department; 2) your business is of a type that is the subject of a special initiative within the Tax Department (for example, restaurants appear to have been recently targeted for increased audit activity); or 3) there might have been something in your tax returns indicating a potential tax deficiency.
Bear in mind that although in some circumstances it might be comforting to know why your business was selected (if, for example, you were randomly selected and not because there was something suspicious about your tax returns), the point is academic: whatever the reason that you are being audited, you must prepare for the audit with the same intensity and attention to detail. If you are unprepared, you risk receiving a far less favorable outcome than you might otherwise be able to obtain.
2. Do I have to give the auditors everything that they ask for?
Yes. Essentially, the Tax Department has authority under New York law to request any books or records that represent the activities of your business. There are many ways that the auditors can determine the amount of sales tax that they believe you should have collected (more on this point in Question 4 below); they are not limited to examining your cash register tapes or computerized sales records. The law gives them the ability to obtain any documents that they may need for the task.
A crucial related point: Whenever there are “information gaps” such that the Tax Department cannot accurately determine the correct tax liability, those gaps will always be construed in a light least favorable to you. This means that facts will be assumed that generally will result in the highest tax reasonably possible, even if the actual tax liability may be lower.
Combine the two previous points with the potential criminal issues that arise when taxpayers attempt to hide information from the Tax Department, and full disclosure is the only option.

3. Do I need to worry about criminal charges?
The answer to this question seems to be changing. In the past, it was unusual to see criminal charges in anything other than the most egregious cases. Today, however, criminal charges are being brought in even relatively small cases. For example, in August of 2009, the Tax Department announced a case in which criminal charges were brought in connection with a sales tax deficiency of $17,000. In this environment, the potential for criminal charges should therefore always be a consideration.

4. I don’t have any electronic records or cash register tapes – what will the auditors do?
The Tax Law provides that every person required to collect tax must keep records of every sale in a manner suitable to determine the correct amount of tax due. Those records must be made available to the Tax Department for inspection upon request. New York State regulations provide that among the sales records required to be maintained are the following: sales slips, invoices, receipts, contracts, statements or other memorandum of sale, guest checks, cash register tapes and any other original sales documents.
If you fail to maintain these records (or if you do maintain them, but they are incomplete), the Tax Department can use any reasonable indirect method to determine the proper amount of sales tax due. The selected method does not have to produce exact results. One method that auditors use is the direct observation of sales at your business. The auditor will observe a sample period, and then extrapolate the totals across the audit period. Another method auditors may use is to request information from your third-party vendors, and then calculate total sales using standard “mark-ups” from your cost of sales.
In short, this is an area where auditors have a good deal of discretion, and it can be difficult to challenge the method chosen.

5. Why have I received a “responsible person” questionnaire?
In addition to the liability of the business itself for any unpaid sales tax (in the case of businesses conducted through entities such as corporations and limited liability companies), New York also imposes liability on those who are deemed “responsible persons” under the law. A responsible person is generally someone that was in charge of collecting the sales tax or who signed the tax returns – for example, a manager, an owner, or an officer, etc. The responsible person questionnaire is designed to help the auditors identify those individuals.
In many cases there are multiple “responsible persons.” The Tax Department can, and usually will, try to collect any deficiencies from any or all of them if the business is unable to pay. If you could potentially be a responsible person, consult your tax advisor immediately regarding your rights and potential liabilities.

6. Will this lead to an income tax audit next?
It certainly could. Remember that the amount of sales tax due is a percentage assessed on the basis of your gross sales. Gross sales are of course used in determining your net income and any related income tax. Thus, for example, if the applicable sales tax rate is 8%, and it is determined that there is a $10,000 sales tax deficiency, depending on the circumstances, this might indicate that there is $125,000 in associated income that may not have been reported on your income tax returns.
Accordingly, where the potential for unreported income is significant, a referral to the income tax auditors is likely. However, to our knowledge there is no publicly disclosed threshold for referral. We note that the Tax Department has recently released a decision involving a referral based on a deficiency similar to the amount indicated in Question 5 above.

7. If the auditors claim that I owe additional taxes, will there be interest and penalties?
Yes. Depending on the amount of the underpayment and the year in which it occurred, the penalties and interest can be significant – often 50% or more of the tax due. In some circumstances, penalties can be waived. An interest charge, however, is mandatory.

8. Will the case be closed forever if I pay the tax that the auditor claims is due?
Most of the time, if you make a payment in satisfaction of an audit adjustment (or receive a “no change” letter), that will be the end of the matter. However, if the statute of limitations has not run with respect to a year that was previously the subject of an audit, the Tax Department retains the right to assess additional taxes if it becomes aware of information that indicates that additional taxes should have been paid.

9. When will I be audited again?
The frequency and pattern of audits is an administrative and policy matter at the Tax Department. Although we are not aware of any publicly available policy statement on the issue, our experience indicates that if you were audited this year and a deficiency was found, there is a strong potential that you could be audited again soon.

10. Where can I find more information?
As discussed above, there are significant legal issues in every sales tax audit. These include, among other things, whether: 1) “responsible person” liability will apply to you or others in connection with your business; 2) sufficient records have been maintained as required by New York State regulations; and 3) there is a potential for criminal charges to be brought. These issues must be confronted from the moment the audit notice is received to preserve your rights and to allow your advisors to develop appropriate strategies to minimize taxes and penalties and protect the business. Sales tax audits also involve complex factual issues. All of your relevant business records should be reviewed and analyzed by your advisor prior to their disclosure to the Tax Department to understand the strengths and weaknesses of your case, and to prepare accordingly. You should consult with a qualified attorney about these issues.
The Tax Department (its official name is the New York State Department of Taxation and Finance, and it is often referred to as “DTF”) publishes a lot of useful general information on its website. Relevant information is provided at the following link: http://www.tax.state.ny.us/nyshome/stidx.htm. You can also search for “sales tax audit,” and specific topics (such as “responsible person liability”) in the search engine on the upper-right-hand corner of the page.

• What does state and local tax include?
• How much of a client’s time is normally required?
• What information does the client need to provide for a review?
• What types of issues typically arise in a review?

Why have an independent state and local tax review?

Every taxpayer can benefit from a fresh set of eyes periodically reviewing how state and local taxes are managed. A fresh perspective nearly always results in significant savings. Understanding ever changing state tax laws, agency practices and rulings are essential. But, it’s only decades of practical experience in multiple states, jurisdictions and industries that allow our professionals to identify and implement proven tax-reducing strategies. Madison Cooke has a proven 24-year track record of creating substantial state and local tax savings for our clients.

What sets us apart?

Focus – State and local tax isn’t just our expertise – it’s all we do.

Practical experience – Each of our professional associates bring at least 25 years of practical experience with state and local sales, use, B&O and personal property tax. Our practical experience involves auditing, accounting, finance, law, and tax administration. Our associates include former senior auditors of the Washington Department of Revenue in addition to former tax managers and tax administrators for manufacturing and high-tech companies. We’ve been in your shoes and understand your business and concerns from an insider’s point of view.

Comprehensive approach – We don’t focus on the low hanging fruit. All Madison Cooke’s resources are applied to a thorough and complete review and analysis. Our experience, at many levels and in many industries, has beneficial cross-over effects that other firms can’t match.

Forensic analysis – We are state and local “tax detectives.” Getting results requires both “art and science.” Consequently the professional associate who does the review and analysis has to be the same person who knows the law and theory, not a junior associate.

Proven results – In 80% of our reviews we have identified and successfully recovered tax dollars for our clients.

Follow up – Comprehensive training is provided after a successful review. We make sure you understand and implement the tax reduction strategies we identify.

Value – Our commitment is to deliver a service that is dramatically more valuable than the fee we earn.

What does state and local tax include?

For Madison Cooke’s clients’ state and local tax includes sales, use, business & occupation (B&O) and personal property taxes. We don’t do anything else.

What types of state and local tax services we provide?

Review (“Reverse Audit”) – Madison Cooke will do a comprehensive review of your sales, use, B&O and personal property tax. No guesswork, no wasted time, just results. Over 80% of the time we find that our client is paying too much state and local tax.

Audit Management – Madison Cooke manages state and local tax audits. Our assistance ranges from complete audit management to behind the scenes review of an auditor’s work. In either case it begins with a pre-audit review to assess your company’s areas of exposure and opportunity.

Consulting – We obtain determination letters, conduct “no-name” negotiations, and research specific state and local tax issues. We structure transactions to minimize, defer, or eliminate state and local taxes. We facilitate proactive tax planning.

Compliance – For most of our personal property clients we file annual tax affidavits with county assessors. Our compliance clients pay less tax and are better able to manage and administer their personal property tax costs. We often provide assistance and training with other aspects of state and local tax compliance and administration.

How much of the client’s time is normally required?

Madison Cooke’s experience means we not only find more “misplaced tax,” it also means you and your staff will spend less time involved in the process. We start any review with a preliminary analysis. That analysis begins with a one-hour meeting to get acquainted with you and your staff and get a feel for your company’s systems. After the meeting we spend an additional 2 to 4 hours (depending on the size and complexity of your company) independently reviewing the records we previously requested. When we are finished we go back to our office to continue our analysis. If the preliminary analysis indicates a reason to proceed we will communicate a plan for the completion of the review.

If refund issues are discovered Madison Cooke handles all aspects of processing refund claims. That includes scheduling of refund claims, presentation of refund claims to vendors or governmental entities, managing of refund audits, refund negotiation, and any other actions necessary to ensure the refund is received.

What information does the client need to provide for a review?

We provide a list of documents necessary for a preliminary review. Typically we will review and analyze (depending if it is an excise or property tax review) accounts payable invoices, purchase orders, contracts, fixed asset schedules, general ledgers, trial balances, excise tax returns, federal tax returns, current and prior state excise or property audits, personal property affidavits and assessed value notices. Typically our review begins with a review of the last complete fiscal year.

Our clients pay nothing if we don’t produce tangible, satisfactory results. Because most of our work involves a review, most of our clients pay us based on our performance – no refund, no fee. We determine our fee in one of three ways:

Performance – Performance fees (contingency) are based on a percentage of the tax savings and/or refunds achieved through Madison Cooke’s efforts. No savings or refunds – no fee. The percentage and time period covered are agreed to before any work begins.

Project/Hourly – Project/hourly fees are based on the estimated amount of time necessary to complete a specific project multiplied by Madison Cooke’s hourly rates.

Hybrid – A combination of a performance and project/hourly fees often makes sense; particularly for certain types of work and certain types of clients. As with everything else, flexibility is important.

What types of issues typically arise in a review?

No two reviews are exactly alike but there are common themes.

Misunderstanding a particular credit, exemption or program:

• Research & Development in non-traditional high tech and non-high tech taxpayers – In other words a client may have an engineering department whose activity falls under the statutory definition of “Research & Development.” R&D activity carries significant sales/use/B&O tax advantages.
• Availability and scope of tax deferrals – Similarly, identifying eligibility for a deferral has significant tax advantages.
• Availability and scope of exemptions – Similarly, identifying eligibility for an exemption has significant tax advantages.

Misunderstanding key elements of the taxpayer’s business:

Accounting systems are NOT built for excise tax:

• The use issue described above is often manifested in the accounting system. In other words, tax decisions are made by reference to “taxable” and “non-taxable” accounts which reflect the type of purchase rather than the intended use of a particular purpose.
• Simple errors in charging purchases to the wrong account can result in significant overpayments. For instance a common error is inventory purchases coded to a supplies account.
• Products and revenue accounts and classifications are often driven by other business issues (i.e. marketing or sales) and do not provide accurate information for excise tax reporting.

DOR audits & advice:

How successful are we?

• When engaged by a client to review a DOR audit, on average, for every $1 assessed by the auditor, we obtained $3 of credits. In only two cases did the client owe the state tax and then it was less then $50,000.
• When engaged to follow another excise tax consultant we have always found at least 50% more in additional tax credits.