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The sales and use tax has long existed in New York state, but enforcement and collection at the individual level have been poor at best. Now, New York has joined other states, including New Jersey and Connecticut, in instituting a program to regain this “lost” sales and use tax revenue. During 2003, the state Legislature passed new laws aimed at improving the collection of use tax by requiring taxpayers to report and pay use tax on individual income tax returns. The use tax applies when an item purchased should have been subject to sales tax but no sales tax was charged. This occurs when an item is purchased out of state, abroad, by catalog, phone or over the Internet. Taxpayers are required to pay New York state the amount equal to the sales tax on these types of purchases when sales tax was not paid or the amount paid was less than the state sales tax. If excess sales tax was paid because another state’s rate is higher than New York’s, a credit for the difference is available. With most states running deficits and seeking additional sources of revenue, and the proliferation of online and catalog purchasing, a change in reporting and enforcement was inevitable. Calculating the Tax There are two methods for the individual taxpayer to calculate and report use tax on a personal return. To compute use tax for personal (not business) purchases of individual items or services costing less than $1,000 each (excluding shipping and handling), taxpayers may use one of the following two options: � Simplified Method: A table is provided enabling the taxpayer to report use tax based on income level. As an example, a taxpayer using the table, whose income is between $100,001 and $150,000 reports $54 of use tax. This simplified method is intended to reduce record keeping and limit the level of scrutiny by the tax authorities. � Exact Method: The taxpayer calculates the use tax due based on the taxpayer’s actual purchases where no sales tax or an improper amount was collected and the local sales tax rate where the taxpayer resides. For purchases in excess of $1,000 (excluding shipping and handling), and for all business purchases, the exact method must be used. For single purchases in excess of $25,000 on which the proper amount of sales tax was not paid, the taxpayer is required to file a separate sales and use tax form. This form, attached to the personal income tax return, discloses the vendor, the item and the date and location of the sale. Taxpayers may be subject to interest and penalties on unpaid sales or use tax. Enforcement may take place both at the individual level and directly with companies that sell online or through catalogs within New York state and do not charge New York state sales tax. By obtaining customer lists from these organizations, the tax department has a ready list of targets to pursue. While companies might be reluctant to report on their clientele, it may be less painful than raising the ire of the tax authorities on other matters. Other Sources Additional sources of information about taxpayers who may owe sales and use tax already include the U.S. Customs Service, for travelers returning from abroad, and from observation of residents shopping out of state in areas that border New York state. It is anticipated that these avenues of collection will be stepped up as well. Another avenue the tax authorities are pursuing involves luxury items such as jewelry, art, antiques and furs. Buying these items and having them shipped to addresses outside New York state avoids the imposition of sales tax. New York has specifically identified and stepped up enforcement efforts aimed at curtailing this type of activity. Sales and use tax is not just an issue affecting parties shopping out of state. Many counties within New York have different local tax rates. Use tax is due on purchases made in one county for use in another county where the tax rate in the resident county is higher. With 62 counties in New York state, many of which have different sales tax rates, reporting and enforcement of this aspect of sales and use tax will likely be minimal. Non-residents of New York state who conduct a business in New York and report the income on Schedule C are also subject to the sales and use tax, which would apply to any goods or services used in New York. If the taxpayer believes that sales and use tax is not owed, “0″ should be entered on line 56 of the New York State Resident personal income tax form IT-201. Failure to enter any amount on line 56 may result in the statute of limitations on assessment remaining open. This would allow the state taxing authorities the potential to assess tax at any point in the future including interest and penalties. In addition, taxpayers with large liabilities who fail to report the use tax due may be considered to have filed a fraudulent return, potentially subjecting a taxpayer to very harsh penalties. In this new environment of enforcement, taxpayers should be sure to obtain appropriate guidance regarding potential sales and use tax obligations. Jay A. Scheidlinger and Roberto Viceconte are attorneys and certified public accountants at Weiser LLP, in Lake Success, N.Y.

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