Did you know that restaurant owners are among the most high profile and common delinquent taxpayers in New York State, according to a Bloomberg BNA analysis? Sales tax rules for restaurants are complex and failure to collect and remit taxes to the state is subject to significant penalties. If you have a restaurant, here are a few recordkeeping issues you may not know:
Sales tax resale certificates needed under new law.
Under New York’s prior law, sales of restaurant-type foods were always taxable, even when it was sold for resale, although the resale purchaser could apply for a credit or refund after the fact. However, a new law passed in June 2018, expanded the use of resale exemption certificates affecting the restaurant, catering, and hospitality industries. Now sales of restaurant-type foods, including heated foods and heated beverages, can be made tax free, provided the sale is for resale – meaning the purchaser intends to resell the prepared food to its customers. However, the business must collect and maintain properly completed exemption certificates on these new resale transactions in order to substantiate why tax was not collected. A properly completed resale certificate can qualify as an “audit-proof” defense that a given transaction was exempt from taxation.
Electronic recordkeeping using Point-of-Sale (POS) Systems
If your business uses a POS system, you need to ensure that it is properly set up and accurately recording your transactions. Electronic POS records must permit a direct reconciliation of the business’s receipts with the entries in the restaurant’s books and records. In other words, you need to maintain auditable internal controls to ensure both the accuracy and completeness of the transactions recorded in the POS system.
Specifically, a tax auditor must be able to trace any transaction back to its original source or forward to a final total. This means the POS system’s audit trail must be activated. Any records maintained electronically must be safely stored and readily accessible in the event of an audit.
Consequences of poor recordkeeping
Where a business does not have proper records, the law allows the auditor to estimate the business’s tax bill using various indirect methods. In other words, because you cannot prove what your actual purchases and sales were, the auditor can make an educated guess and then hand you a bill assessing tax, plus penalties and interest. The business then bears the burden of proving that the auditor’s projected tax assessment is erroneous. Take note, however, while the auditor is not required to choose the most reasonable method to estimate the tax bill, the method chosen must be rationale so under the right circumstances, taxpayers can win those fights.
In addition to having the auditor determine what he/she thinks you owe, penalties and interest as high as 14.5 percent may be imposed for failing to pay sales tax. A business may also have its Certificate of Authority revoked or face criminal prosecution for failure to pay. The State may use any combination of enforcement methods, such as warrants, levies, income execution and seizures, to collect what is owed.
Certain individuals may also be personally liable for sales-and-use taxes. Sales taxes are collected (or should be collected) from customers by the restaurant as a fiduciary for the state. Not only is the restaurant responsible, but certain individuals (owners, officers, directors, employees, partners or members) who are active in the restaurant’s management may be deemed “responsible persons” and can be, and often are, held personally liable for taxes owed by the business. A responsible person who doesn’t pay the debt can also lose his/her driver’s license. New York can suspend a taxpayer’s New York State Driver’s License if (1) a taxpayer owes $10,000 or more in taxes, penalties, or interest, and (2) no collection resolution is in place (such as an installment payment agreement, income execution or offer in compromise).
If you haven’t collected or paid sales tax, New York State does offer relief in the form of the Voluntary Disclosure and Compliance Program. The State will not impose penalties or bring criminal charges against eligible taxpayers with a history of noncompliance who come forward and pay their outstanding tax liabilities. As an added incentive, qualified taxpayers are also eligible for a limited look-back period.
Restaurant owners should contact a tax professional to discuss compliance with sales tax rules and how to resolve a tax dispute.