Line 56: Enforcing New York’s Sales and Use Tax

Line 56: Enforcing New York’s Sales and Use Tax
What You Should Know About This New Reporting Requirement

By Dennis O’Leary, Legislative Counsel

Continued from the Home Page

For decades, New Yorkers have been responsible to pay any sales or use tax due, within 20 days from the date the property or service purchased is first brought or delivered into New York state. Taxpayers, who are not sales tax vendors, use form ST-130 to pay sales and use tax.

Now, tax practitioners for individual clients must deal with complicated sales and use tax instructions for line 56. In some cases, clients could be stunned to learn of this new reporting requirement, as well as the additional tax due on their income tax return for unpaid sales and use tax.

This is a serious matter that should not be overlooked by the practitioner. The Instructions to IT-201 state: “The tax department has the authority to issue an assessment for, and impose penalty and interest on, unpaid sales or use tax. The department conducts both routine and special audits that produce this type of information.”

Sales and use tax information comes from other sources as well. The U.S. Customs Service provides the department with information from customs declarations filed by New York state residents returning from overseas travel. Several other states provide information to the department when an audit is conducted on a merchant of one of the other states and sales to New York state residents are discovered.

On Jan. 14, New York State Tax Commissioner Andrew Eristoff and his staff met with New York State Society of CPAs’ representatives led by Stephen Valenti, chair of the Tax Division Oversight Committee, and Mark Levin, chair of the New York, Multistate and Local Tax Committee, to discuss concerns about line 56.

Important Considerations

The instructions for IT-201 state that if a client does not owe sales or use tax, a “zero” must be entered on line 56. At the meeting, department staff said that the statute of limitations on the use tax will not run if the line is left blank. Therefore, the best practice is to not leave the line blank. Furthermore, if a client has already filed a ST-130 for 2003, it still is necessary to start the statute of limitations running for line 56 by entering a zero. However, no letter or statement of explanation is necessary to accompany the personal income tax return regarding the prior filing of a ST-130 for 2003.

On extensions, the instructions provide: “If you are requesting an extension of time to file your personal income tax return and you owe sales or use tax, you must pay any sales or use tax you owe at the time you request the extension…If you receive an automatic extension of time to pay your New York state personal income tax (e.g., you are in a foreign country), your sales or use tax is due when your New York state personal income tax return is due.”

The instructions for IT-201 provide a chart based upon AGI to report sales or use tax due on the aggregate of non-business-related items or services costing less than $1,000 each, excluding shipping and handling. (Or use an exact calculation from worksheet #1 in the instructions at page 37 relating to exemption on clothing or footware costing less than $110, excluding shipping and handling, purchased on or after Jan. 1, 2003, and before June 1, 2003, or on or after Aug. 26, 2003, and before Sept. 2, 2003.)

A separate worksheet #2 is provided to report the tax amount on aggregate cost non-business-related items or services costing $1,000 or more for each, excluding shipping and handling (see worksheet #2 in the instructions at page 37).

The instructions provide an example of a Monroe County resident who ordered a $1,500 computer (excluding $100 of shipping and handling) from a retailer in Michigan, who did not collect the New York or Michigan sales tax. The computation on worksheet #2, based upon a combined New York state and Monroe County sales tax rate of 81/4 percent, yielded a tax due of $123.75.

If any item or service costs $25,000 or more each, excluding shipping and handling, the practitioner must also complete Form IT-135, “Sales and Use Tax Report for Purchases of Items and Services Costing $25,000 or More,” and this form must be attached to the client’s personal income tax return. To determine whether the tax paid to another state or local jurisdiction in another state qualifies for a credit against New York state or local sales tax, the instructions refer to Publication 39, “Guide to New York State Reciprocal Credits for Sales Taxes Paid to Other States.”

Worksheet #3 at page 38 of the instructions relates to tax due on Schedule C, C-EZ, and Schedule F taxable business purchases or Schedule E (Part I) taxable royalty or rental real estate activity–related purchases during 2003. For example, if a client buys a computer for his unincorporated business to be shipped from Michigan in 2003, the use tax would be due on line 56 of his personal income tax return by April 15, 2004, notwithstanding the fact that the cost of the computer, excluding the sales tax paid on line 56, would be deductible as a business expense for 2003. The question as to the deductibility of the sales and use tax will be dependent on the method of accounting for the unincorporated business.

Helpful Resources

Tax practitioners who prepare personal income tax returns will need to be competent in the New York state sales tax. There are issues of what property and services are subject to sales and use tax in New York, and which are exempt. Information on line 56 and other sales tax issues are addressed at www.nysalestax.com, a website developed by Michael Buxbaum, a member of the New York, Multistate and Local Taxation Committee, who also attended the meeting with Eristoff.

An ideal way to obtain information on unpaid sales or use tax from clients is to place a supplement in the tax organizer to acquaint the clients with this new reporting responsibility. Information should also be requested from clients on unpaid sales or use tax on purchases of items or services in each of the three categories covered by the worksheet included in the instructions.
Ruth Sattig Betz, a member of the New York, Multistate and Local Taxation Committee, has developed a supplemental information sheet for 2003 explaining line 56 to her clients and requesting information on purchases of items and services subject to unpaid sales or use tax. It includes a signature line for the client stating that the information provided is true, correct and complete, to the best of the client’s knowledge.

Betz has authorized the Society to share this information supplement with practitioners, who can modify it as they deem appropriate and refer to their own county of practice. (See supplement at right.) The NYSSCPA website, www.nysscpa.org, under the “For Your Info” banner contains helpful links related to line 56, including a sample tax organizer questionnaire for practitioners, the tax department’s revised TC 201 instructions and TC 201 glossary, and tax department information on purchasers’ obligations to pay sales and use taxes.

The following Society members also participated in the Jan. 14 meeting: Stewart Buxbaum, Kenneth Zemsky, Steven Eller, Barry Horowitz and Maryann Winters. Zemsky will work with the tax department to develop a list of frequently asked questions regarding line 56, which will be posted as FAQs on the department’s website at www.tax.state.ny.us and on the Society’s website.