June 27, 2023
Bowers & Company was approached by a company who was subject to a NYS sales tax audit for the tax period December 1, 2013, through November 30, 2017. The sales tax auditor examined a sample of invoices and noticed that the company was not paying sales tax on materials and other supply parts.
The company leases property from various Industrial Development Agencies, also known as IDAs. Generally, purchases made directly by an IDA are exempt from sales tax. In addition, purchases made by an agent of the IDA or contractor of an IDA are also exempt.
The company purchased various materials, which were then used to improve the real property owned by the IDAs. The company assumed that any purchases related to the improvements were tax exempt, as they believed they were acting as an agent of the IDA.
Based on the language of the IDA agreements, the auditor concluded that the company was not an acting agent of the IDAs. Therefore, NYS took the position that the purchased materials were subject to sales tax. The initial proposed assessment was approximately $1,400,000.
Bowers & Company CPAs was immediately hired by the company to discuss the issues with the NYS sales tax auditor. Based on our understanding of the sales tax rules and IDA agreements, we were able to take the position that the Company was acting as a contractor for the IDA. Based on the contractor position, the company would be exempt from sales tax on the purchased materials. NYS agreed with this position on a retroactive basis.
While the company’s claim that they were an agent was denied by the NYS sales tax auditor, our expertise in sales tax rules allowed us to propose a contractor exemption. As a result of Bowers & Company CPAs contestation, the proposed assessment was reduced by approximately $950,000.
As a result of the audit, the company was in compliance through the tax period November 30, 2017. In addition, Bowers has worked with the company to take the steps necessary to ensure future compliance.
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Disclaimer: To ensure compliance with requirements imposed by the Department of Treasury, we inform you any U.S. federal tax advice contained in this document or video is not intended for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.