Objective

To determine whether the Department of Taxation and Finance (Department) has taken steps to ensure that persons who are required to register as sales tax vendors, including those with no physical presence in the State, have done so. The audit covered vendors with a Certificate of Authority that was active at any time during the period from June 1, 2018 to August 5, 2020, as well as applications for sales tax registration received by the Department from June 1, 2018 to August 5, 2020 and their application status as of November 20, 2020.

About the Program

The Department is responsible for administering more than 40 State and local taxes, including the sales and use tax. Provisions of State Tax Law (Law) impose a tax on sales of tangible personal property and certain services, with some exemptions, and require vendors that make these sales to register for a Certificate of Authority (COA), collect the tax from customers, and remit the tax to the State. New York’s sales tax is imposed at a rate of 4%. Additional sales taxes are administered by the Department and imposed by localities and range from 3% to 4.875%, and in the Metropolitan Commuter Transportation District at 0.375%. The use tax is imposed on taxable items or services used in New York when a sales tax has not been paid.

Under the Law, the term vendor encompasses anyone, including out-of-state sellers, who regularly or systematically solicits business in the State. Vendors without a physical presence in New York must register if they have both sold more than $500,000 of tangible personal property that was delivered in New York and conducted more than 100 sales of tangible personal property delivered in New York during the preceding four tax quarters. The Department may deny a COA in some circumstances, such as when a vendor submits an incomplete application or has unpaid tax debts. The Department may also assess penalties of up to $10,000 on vendors that make taxable sales without a valid COA. According to the Department, as of August 5, 2020, there were approximately 540,955 active registered vendors in New York.

Key Findings

• The Department has generally taken steps to ensure that entities required to register as sales tax vendors, including those with no physical presence in the State, have done so. However, we found several opportunities for improvement.
• We identified vendors that were denied a COA yet continued to operate and likely made taxable sales, as well as unregistered vendors that submitted sales tax returns showing taxable sales. For the two samples of 50 and 43 vendors tested in these areas, we identified 18 vendors that reported taxable sales, or were potentially making taxable sales, without a valid COA. These 18 vendors may have been subject to penalties totaling up to $180,000. These findings were attributable, in part, to the lack of information-sharing among the Department’s divisions and the lack of relevant follow-up.

Key Recommendation

• Improve inter-Department communication and follow-up measures to:
  • Identify and address unauthorized sales activity among vendors for whom the Department denied a COA; and
  • Provide better assurance that unregistered vendors that are notified of the conditions requiring them to register as sales tax vendors have done so where necessary.