Facing declining revenues and increasing budget shortfalls, many states have found a new way to raise significant money; through enforcement of existing tax laws. From residency audits of individuals to collection of sales, income and payroll taxes from out of state businesses, if you are not complying with state tax laws, you are flirting with disaster.
In recent years, New York State has collected billions of tax dollars from people who maintained a residence in New York but claimed to be a resident of another state (often Florida). If you maintain a residence in New York and enter the state more than 182 days, you are a New York resident, and subject to all its tax laws. Maintaining a residence can be owning or renting, and entering the state can be going to work; you do not have to spend the night or even visit the residence. If you do spend the night, it automatically counts as two days, the first is the day you go to sleep and the second is the day you wake up. If you have a house anywhere in New York State work in Manhattan every day, you are a New York resident who is subject to New York State income tax, because you maintain living quarters and enter the state more than 182 days during the year.
There is also bad news for New Jersey people who claim residency in another state - the New York State Tax Commissioner who did all this good work has just started working for Governor Christie, so get ready for a lot of residency audits. Do you spend the winter in Florida and keep your house in New Jersey, but claim to be a Florida resident? If you do, must keep records and documentation to prove where you are each and every day of the year.
As bad as it may be for individuals, the potential ramifications are much worse for business. Let's say you have a business in New Jersey, and your customers are all located in the state. Your business sells something, say household appliances. One day you get a call from someone in New York City who wants to buy a washing machine. You sell him the washing machine, deliver it to his location, remove the old washing machine, and install the new one. And by the way, since you are a New Jersey company and not registered for New York tax, you don't bother collecting New York Sales Tax. He is so happy to save 8.8% sales tax, he tells all his friends, and before you know it you are making deliveries every week. You also forget to tell your CPA about the New York sales. Several years go by, and you get a notice from New York. What taxes are you liable for? New York State and City income taxes, payroll taxes, and sales taxes, and if your business is a partnership or LLC taxed as a partnership, the partners are liable for New York nonresident personal income tax as well.
In these situations, sales tax is often the biggest problem, the one that may put you out of business. Even though you did not collect sales tax, you are still responsible for remitting it for all taxable sales. With the addition of penalties and interest, the liability can be staggering.
One more thing that often suprises business owners is use tax. If you purchase a taxable goods or services and the seller does not collect sales tax, you are required to voluntarily remit the tax to the State. If you are audited by the State and the auditor identifies purchases on which you should have paid sales tax but did not, you will be required to pay the tax, plus penalties and interest. The fact that the seller should have collected tax but did not will not relieve you of this liability.
The consequences of noncompliance with State tax laws can be devastating to a business. Now is the time to conduct a review of your business operations to identify and deal with State tax compliance issues.
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