Avoid Running Afoul of New York State Sales Tax Law
Real estate businesses in New York face sales tax issues; it's a fact of life in the Empire State. And, generally, when a real estate business fails to comply with its tax obligations, the New York State Department of Tax and Finance (DTF) sends it a notice of examination. The notice triggers an audit of the business owner's transactions and purchases for a period up to six years prior to the audit. Business owners who have undergone a tax department audit are aware that it can cost hundreds of thousands of dollars and, possibly, into the millions.
With the help of housing expert A.J. Johnson, we will give you tips for dealing with the five major sales tax issues that you, as a New York real estate business owner, must deal with daily. Also, we will explain the legal obligations of a real estate business regarding tax payment, and the consequences of failing to comply with requirements set by state tax examiners.
Five Vital Sales Tax Tips
The following five tips cover tax-related issues that every New York-based real estate business owner should bear in mind, according to Johnson:
1. Register as a vendor. A real estate business must register as a vendor for purposes of New York State's sales and use tax. Sales tax may be collected on certain resident charges, such as electricity, cleaning charges, building security costs, and trash carting. If an owner fails to pay sales tax related to such charges, the owner might be required to pay the amount of tax due to the state upon the audit.
2. File sales tax returns. An owner of real estate must register and file sales tax returns. The consequences of failing to do so could include increasing the audit period to six years from the standard three-year period that applies when returns are filed correctly.
3. Self-assess and pay the use tax. A real estate business must pay tax on purchases from an out-of-state vendor, even when the vendor does not collect sales tax. In New York State, a purchaser is required to self-assess the amount of tax owed and pay a use tax. A record of how the assessment was made should be kept. (In New York State, a use tax is paid at the same rate as the state sales tax.) Sales tax is charged on most purchases from out-of-state vendors. However, there is an exception for purchases that are considered to be “recurring,” such as supplies, fixtures, and certain items of equipment.
4. Know the difference between capital improvements and repairs. A repair to a building, for example, is subject to a sales or use tax, whereas a qualified capital improvement is not. New York State tax examiners have sole authority on deciding what constitutes a repair as opposed to a capital improvement. The difference may be technical, but the tax examiner's determination has enormous financial consequences.
A capital improvement is generally an addition to a property that adds value and prolongs useful life, while a repair corrects a damaged component. For example, patching a roof is a repair, but replacing a roof is a capital improvement. Likewise, replacing a broken window is a repair, but replacing all windows in a building would generally be considered a capital improvement.
New York State tax examiners have imposed a use tax on sites whose owners improperly claimed work as capital improvements instead of repairs, Johnson says. A certification by the site's contractor that the work was a capital improvement rather than a repair carries no weight during the tax examiner's independent determination, he adds.
5. Guard against successor liability. The buyer of a real estate business located in New York State must report the purchase no less than 10 days before taking possession of the business. If the buyer doesn't report the purchase on time, the buyer may be held liable for the seller's unpaid state sales or use tax liabilities.
The issue is important for due diligence during acquisition of the business, Johnson says. The buyer may be liable for the sales tax whether or not the buyer acquires “an existing interest” or the “outright assets of the seller,” he adds.
A.J. Johnson: President, A.J. Johnson Consulting Services, Inc.; Williamsburg, VA