New York Sales Tax Audits: Are Test Period Agreements Binding?

Brian Gordon, CPA
Published Date:
Jan 1, 2016

There are many different types of sales tax audits.  Audits of cash businesses, which are often closely-held or family-owned businesses that lack internal controls, are very common. In these audits, records are sometimes incomplete or, as the state audit division would say, “inadequate.” An auditor may then employ an indirect method to determine if the reported sales are correct; this could be based on a physical observation of the business, like counting actual sales for a full day, or calculating sales using ratio analysis.

A common audit issue for larger businesses is “use tax”: if the business is not charged sales tax on purchased items, then the purchaser owes this tax which is called “use tax.”  Use tax is equivalent to the sales tax for the jurisdiction in which the purchased item is used.  In larger, more substantial businesses, there is generally a full set of books where an auditor can trace any transaction back to its original source or forward to the final total--what the audit division calls “adequate” books and records.

Assuming a 12-quarter (three-year) audit, “adequate” records may include hundreds or thousands of purchase invoices to examine.  To save time, auditors will offer to review the applicable records in a sample test period.  If they find errors in that test period, they will project that test period’s error rate over the entire 12-quarter audit period.  If the business consents to this method, it signs a test period agreement before the audit begins.  In theory, this is fair to both parties and saves a lot of time.

Test period agreements generally include a provision that states: “When my records are complete and available for the entire audit period, the Tax Department may not determine my tax based upon a test period audit without my consent (emphasis added). However, if I find that it may be practical to use the test period method audit, I may agree to use such method by completing this form.” The form also states that the election does not preclude the business from contesting the audit results, the particular test period selected, the inclusion of certain transactions within the test, the taxability of certain transactions, or the method of projecting the results of the test period findings.

Are you bound by this agreement? The recently-decided In re: Top Drawer Custom Cabinetry Corp. addressed this issue, and the Tax Appeals Tribunal considered the following facts to reach its decision that the agreement was indeed binding:

-- The president of the company signed a test period agreement and consented to the method’s use.

-- The execution of the test period agreement occurred in the presence of the company’s representative. 

-- The parties checked boxes expressly agreeing to the test period audit method for the audit of sales and recurring expense purchases.

After receiving the results of the test period audit, the taxpayer brought in a new representative to discuss the audit findings at a conference.  At the conference, the new representative retroactively revoked consent to the test period method, and requested instead that the Division of Taxation perform a detailed audit for the entire audit period. He argued that this was valid because the audit was not complete, but the Division denied his request because the taxpayer had already consented to the methodology.

In its brief, the taxpayer’s representative stated that he examined two other tax periods and found that while one of the periods was consistent with the Division of Taxation’s audit results, the other period would have resulted in a more favorable result to the taxpayer. The taxpayer contended that revoking consent to the test period methodology was valid because it was made before the audit was completed, and before the tax was fixed.

The Division of Taxation argued that by executing the test period agreement, the taxpayer waived its right to a detailed audit for the entire audit period and that it had already completed the audit by the time the taxpayer requested a full audit.  The Division also asserted that the taxpayer had not shown any error in the test period audit method or its results.

The tribunal rejected the taxpayer’s claim that it had successfully revoked consent, citing Nassau Trust Co. v. Montrose Concrete Prods. Corp., which ruled that an executed waiver “cannot be expunged or recalled.” It also found that the Division of Taxation had substantially completed its audit when it issued its findings, and cited O’Connor v. Curcio, which ruled that a valid waiver “cannot be withdrawn once the parties have performed in accordance with its terms.”  

Having determined that the Division properly used a test period audit method, the tribunal then addressed whether the petitioner had met its burden of proof by showing clear and convincing evidence that the test period method employed was unreasonable or that the resulting assessment was erroneous. The tribunal found that it had not presented any such evidence.

What are the lessons we can take away from this case?

  1. If you sign a test period agreement, it will be considered binding.  

  2. To dispute the validity of the test, consider submitting not only evidence that show erroneous results, but also evidence that shows the selected test period was not representative of the entire audit period.

  3. By submitting timely evidence to an auditor, they can consider such evidence in their audit or expand the test to include another period.

If you have questions on these or other New York tax audit issues, please contact the author.

gordon_newBrian Gordon, CPA, is director of state and local taxes at Sanders Thaler Viola & Katz LLP. His primary role is to represent taxpayers with NYS tax audits and other controversies. Previously, he was with NYS Department of Taxation and Finance for many years as the district audit manager in Manhattan and Brooklyn, where he worked on many audits of various tax types, including high-profile residency audits. Mr. Gordon is a member of the NYSSCPA New York, Multistate & Local Taxation Committee. He writes and speaks on various state and local tax issues and posts a monthly blog at He can be reached at 516-938-5219 or 212-370-3743, or by e-mail at  

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