New York’s sales and use tax rules create compliance obligations for businesses that may not even realize they have a connection to the state. Understanding nexus (the connection that subjects you to NY tax) and use tax obligations is crucial to avoiding unexpected assessments.
What Is Nexus?
Nexus is the connection between your business and New York that gives the state the right to require you to collect and remit sales tax. Nexus can be created by:
Physical Presence:
- Office, warehouse, or retail location in NY
- Employees working in NY
- Inventory stored in NY (including at third-party warehouses)
- Sales representatives or agents in NY
- Attending trade shows in NY (limited exception for occasional presence)
Economic Nexus:
- $500,000+ in sales to NY customers AND 100+ transactions (current threshold)
- Marketplace facilitator sales may count toward this threshold
Affiliate Nexus:
- Related businesses with NY presence
- Common ownership or control
Click-Through Nexus:
- NY-based affiliates referring customers to you for commission
Once You Have Nexus
If you have nexus with New York, you must:
- Register for sales tax (Form DTF-17)
- Collect sales tax on taxable sales to NY customers
- File sales tax returns (quarterly or monthly depending on volume)
- Remit collected tax by the due date
Failure to register and collect tax can result in:
- Personal liability for uncollected tax
- Penalties of 5-25% of the tax due
- Interest at ~14.5% annually
- Criminal prosecution in egregious cases
What Is Use Tax?
Use tax is the mirror image of sales tax. It applies when you purchase items for use in New York from vendors who don’t collect NY sales tax (typically out-of-state vendors).
Common Use Tax Situations:
- Buying equipment from an out-of-state vendor
- Purchasing supplies online from vendors without NY nexus
- Buying software or digital products
- Acquiring vehicles or machinery from other states
If the vendor doesn’t charge you NY sales tax, you owe use tax on the purchase.
Who Must Pay Use Tax?
All NY businesses must:
- Track purchases from out-of-state vendors
- Determine which purchases are subject to use tax
- Self-assess and remit use tax
- Report use tax on sales tax returns
Use Tax Audit Red Flags
The DTF targets businesses that:
- Report zero or minimal use tax despite significant purchases
- Have large expense accounts for supplies, equipment, or materials
- Make frequent out-of-state purchases
- Operate in industries with high use tax noncompliance
How the DTF Audits Use Tax
During a sales tax audit, the auditor will:
- Review purchase records for the audit period
- Identify purchases from out-of-state vendors
- Determine which purchases should have been subject to use tax
- Calculate the use tax due
- Assess tax, penalties, and interest
Common Use Tax Mistakes
1. Assuming Out-of-State Purchases Are Tax-Free
Many businesses don’t realize they owe use tax on purchases from out-of-state vendors. Just because the vendor didn’t charge sales tax doesn’t mean the purchase is tax-free.
2. Failing to Track Exempt Purchases
Some purchases are exempt from use tax (items for resale, manufacturing equipment, etc.), but you need documentation to prove the exemption.
3. Not Accruing Use Tax
Businesses should accrue use tax monthly on purchases and remit it with their sales tax return. Waiting until an audit to address use tax results in years of accumulated liability.
4. Misunderstanding Exemptions
Not all purchases qualify for exemptions. Common misconceptions:
- “We’re a nonprofit so we don’t pay use tax” (only if you have an exempt organization certificate)
- “It’s for resale” (but you don’t have proper documentation)
- “It’s manufacturing equipment” (but it doesn’t qualify under NY’s narrow definition)
Marketplace Facilitator Rules
Since 2019, marketplace facilitators (Amazon, eBay, Etsy, etc.) must collect and remit sales tax on behalf of third-party sellers. This means:
- If you sell through Amazon, they collect and remit the tax
- You’re not responsible for sales tax on those transactions
- But you’re still responsible for use tax on your purchases
Voluntary Disclosure
If you discover you have nexus and haven’t been collecting sales tax, or you’ve been underreporting use tax, voluntary disclosure can:
- Limit the look-back period (typically 3 years instead of unlimited)
- Reduce or eliminate penalties
- Avoid criminal prosecution
Audit Defense Strategies
When facing a sales tax or use tax audit:
- Challenge the nexus determination if you believe you don’t have NY nexus
- Provide exemption certificates for claimed exempt sales
- Dispute taxability of specific items or services
- Challenge the audit methodology if the auditor used estimates or projections
- Request penalty abatement based on reasonable cause
How We Help
Our team defends sales and use tax audits by:
- Analyzing whether you actually have NY nexus
- Reviewing the auditor’s methodology for errors
- Gathering exemption documentation
- Challenging taxability determinations
- Negotiating reduced assessments
- Presenting reasonable cause for penalty relief
Sales tax audits can put businesses out of business. If you’re facing a NY sales tax audit, contact us immediately.
