Brewed Awakening: NYS Sales Tax Recordkeeping
Tuesday, July 22, 2014
Think the rent for your restaurant is too high now? Your rental price may cost you in ways you didn’t expect if you haven’t been keeping adequate sales records as required by New York.
Consequences for Inadequate RecordkeepingIf records are considered inadequate, a restaurant may be subject to:
- New York State’s estimate of additional taxes due (for example, the State may estimate sales based on the restaurant’s lease price);
- Penalties and 14.5% interest if additional tax is due;
- Suspension or revocation of the Certificate of Authority to collect sales tax; and
- Criminal penalties for not keeping adequate records, in certain circumstances.
The consequences for failing to maintain adequate records are grave. The State may consider a number of factors to estimate a restaurant’s sales, such as monthly rent. The estimate may substantially overstate the actual sales. If the restaurant owner has not maintained sales records, it may be difficult to challenge estimated figures calculated by the State.
The possible result: A financially crippling sales tax burden to the restaurant owner.
Civil PenaltiesIn addition to a possible sales tax liability, the State may impose civil penalties for inadequate recordkeeping, such as:
- For each sales tax period a taxpayer fails to make available organized records that support total sales reported on the sales tax return, the State may charge up to a $1,000 penalty; and
- For the first sales tax period a taxpayer fails to maintain records or make them available to the NYS Department of Taxation and Finance, the State may charge up to a $1,000 penalty, plus up to $5,000 for each additional quarter or part of a quarter there are insufficient records.
These penalties are substantial. For example, if the tax department conducts a sales tax audit on a restaurant for a three-year period, and the restaurant did not keep adequate records for the full three-year period, the restaurant owner could be subject to penalties of up to $56,000, plus interest. This penalty amount is in addition to any amount of additional sales tax, interest, and failure to pay penalties.
However, with proper records in place, a restaurant can avoid additional taxes and penalties resulting from a sales tax audit. The State has set forth standards of sufficient records.
Required Sales Records A restaurant must keep records of every sale, the amount of the sale, and the sales tax on the sale.
This includes a “true” copy of each:
- Sales slip, invoice, receipt, contract, statement, or other memorandum of sale; and
- Cash register tape and any other original sales document.
A restaurant must keep records for all sales. Even if a receipt is not given to customers, the restaurant must record each sale in some form of journal or daybook. If both taxable and nontaxable goods are sold to a customer, the restaurant must identify on the receipt which goods are subject to sales tax and which are not.
Required Purchases RecordsA restaurant must keep records of its purchases. These records show the taxable status of a restaurant’s purchases. Purchase records should include records related to:
- Purchases subject to state and/or local taxes;
- Purchases for resale (for example, packaging for takeout orders); and
- Purchases exempt from state and/or local taxes for reasons other than for resale, such as sales to charitable organizations.
A restaurant may use these records to demonstrate that business purchases bear a reasonable relationship to the business’s sales. If the Tax Department determines that a restaurant’s cost of purchases is not proportionate to the value of goods sold, the Tax Department may assess additional sales tax.
While a New York State Tax Bulletin only lists three specific types of purchases, records should be kept for all purchases. Whether the purchase is for ingredients, restaurant equipment, marketing costs, or anything else, records should always be kept.
Point-of-Sale (POS) SystemsMany restaurants have adopted POS systems in favor of traditional cash registers. POS systems facilitate recordkeeping by automatically tracking what is sold, but because POS systems provide for simple and reliable recordkeeping, the Tax Department places higher recordkeeping burdens on restaurants that employ POS systems.
Records must be kept for a minimum of three years from the later of the due date of the return to which those records relate, or the date the return is filed. Some POS systems do not have the capacity to store records for this long. Limited storage is no excuse, though. These records must be transferred to an external storage system and stored for at least three years.
As you can see, recordkeeping is critically important for a restaurant. Poor records can make it difficult to challenge an audit, and the combination of a sales tax audit and inadequate recordkeeping could result in serious financial consequences to both the restaurant and its owner.
Restaurant owners should contact a tax professional to discuss how these rules apply to their own situation.
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Tenenbaum Law, P.C. has focused its practice on the resolution of tax controversies for over fifteen years. We offer comprehensive services to businesses and individuals with respect to their Federal and New York State tax matters. Contact their team at info@LITaxAttorney.com or www.LITaxAttorney.com.
Disclaimer: The information contained in this article is not tax advice.