BUFFALO, NY - New York State is ramping up its enforcement of sales tax collection through increased audits of so called "cash based" businesses, which include bars and restaurants.
"They have an initiative they started a little over a year ago to audit pretty much every restaurant establishment in New York State," said David Gross of Sales Tax Solutions and Consulting in North Tonawanda.
But experts like Gross say many establishments who are either unaware of, or --as a matter of practicality -- don't comply with a key component of the the state sales tax code can quickly find themselves in trouble.
"They're required to keep a copy of every single guest check," said Gross, who while conceding that laws requiring this have long been on the books, insists that "for years the state is not really been imposing that."
You Could Be Cooked...
Gross notes many transactions made in the food and drink trade don't even involve guest checks in the first place
"How often do you get a receipt from an ice cream stand, or a hot dog stand? Usually you don't ...and when you get a drink at a bar you're not likely to get a receipt either, Gross said.
Gross says many restaurants and bars rely on their register receipts to prepare their daily summary reports to keep track of sales.
"The summary report just totals it up like a calculator and might list, for example sales of $1,000 worth of food, $500 worth of beverages, ...and 14 ice creams and this is listed the total amount of sale," Gross said.
But businesses which rely solely on their register receipts commonly referred to as their "Z-Tapes" as proof of sales (and thus the amount of sales tax they need to send to New York State) won't find an easy time of things when auditors arrive to begin an investigation.
"Z- tapes are subject to manipulation and if you have a tape that's subject to manipulation, it's difficult for us to feel comfortable when we don't see the backup behind it," explained William Comiskey, Deputy Commissioner for
for Tax Enforcement for the New York State Department of Taxation and Finance.
Comiskey also confirmed for 2 On Your Side's Dave McKinley that the state has begun a more aggressive enforcement of its tax laws.
"It's part of an overall increase in our effort to enforce across a wide spectrum of taxpayers and we are currently engaged in a major increase focused on cash businesses."
To that end the state has beefed up its enforcement ranks by hiring hundreds of new auditors and investigators in pursuit of its effort.
Sound Policy or "Money Grab"?
Comiskey makes no bones that the effort could help the cash strapped state which currently faces a staggering budget deficit
"It's part of an effort to close the multi-billion dollar (budget) gap that New York confronts every year."
But at the same time Comiskey insists this is not a "money grab" as some critics such as Gross suggest.
"There's money to be had here for sure but it's not a money grab," said Comiskey. "We want a level playing field and we want everyone to pay their fair share. The Internal Revenue Service has indicated that in the cash business area as many as 54% percent of businesses, where there is little 3rd party reporting, under-report their income from sales, ...so we decided we need to take a look at it."
Unfriendly To Business?
"The reason that the state is strapped for cash is because they're junkies, and their drug of choice is money," said Mark Supples, the owner of Mothers Restaurant on Virginia Place in Buffalo. "And like a junkie, it won't stop in its habit of spending until it gets all of your money, my money, and the money of my customers."
When Supples became the subject of a sales tax audit it touched off landmark legal battle with the state from which he eventually emerged victorious and which forced the state to change some of its tactics.
Supples' troubles began when he could not produce the guest checks he says investigators demanded seeing upon beginning their audit.
"Which, in the case of a busy restaurant like Mothers, could have been be upward of one million guest checks over a 6 year period. I had been in business for 26 years and the very first time I found out what records I needed to keep was the day I was audited, Supples said.
Comiskey says such excuses garner little sympathy with the state.
"We encounter a lot of businesses that tell us they don't have those records, and I'm frankly a little perplexed by it because they would need the records we're looking at and asking for to run their business properly. But either way they're required under the law to maintain them, and so I think it's reasonable to require them to have those records" Comiskey said.
Supples conceded during an interview with WGRZ-TV that "ultimately ignorance of the law is no excuse", ...but challenged the state's method in determining what it thought he owed.
Gross explained that without the guest checks Supple found himself in the same boat as many others.
"If they don't have a copy of that guest check or each transaction that they make then the state can deem their records inadequate. If the records are deemed inadequate then the state can use alternative methods of auditing them or basically estimate what their sales should have been."
To do this, the state investigates what's being sold and compares it to standards set by national accounting firms.
"One of them is a markup analysis where they compare industry standards to the restaurant that they're auditing and try and do a comparison."
This caused Supple to raise a red flag of his own.
"Our price structure is radically different than a big city for instance you can get a 12 oz. certified angus steak dinner here with soup or salad for $20 , while in New York City that would be more like the price of a burger," he said.
"If there's any variance from that estimate (by the state) to what was actually reported, then the state says you now owe us money, said Gross. "Some of the assessments I've seen have been in the hundreds of thousands of dollars."
It was considerably more than that for Supples.
"The methods they use are very similar to methods that were used by La Cosa Nostra, ..also known as the mob. What they do is come up with a figure that will really scare you then they settle for a lesser figure so basically it's an extortion practice which is really quite effective because the figures they come up with are pretty scary."
"In my case the state said over the 6 years of the audit period I owed them $1.8 million dollars," said Supples, who says the state then proposed a settlement of $250,000.
But Supples decided it was an offer he could refuse, and instead opted to take his case before an Administrative Law Judge and the State Tax Tribunal, hiring Gross to assist him in his fight. Not that it would be easy.
"When you go to (tax) court, you're presumed guilty and you have to prove you're innocent," Supples said.
In December, after spending $150,000 in legal fees (which he now hopes to recover from the state) The Tribunal delivered a rare victory to Supples, and went on record to question the state's method of estimating taxes owed.
In particular it found that for Supples to have done the volume of business and made the kind of money the state had estimated, every table in his restaurant would have had to have been full for eleven hours a day, seven days a week, for six years.
"I really thought it was time somebody stood up to these bullies and extortionists and expose them for what they are and because of my case the state has changed its methods."
Advice: Keep Good Records...
"We are right now looking at of our indices to make sure what we use and when we use it is suitable for the particular audit we are doing," said Comiskey. "But I'd like to go back to this: ..we wouldn't be using an artificial or alternative mechanism for estimating tax liability if the business owner maintained the records that they're required to by the law.
Supples' victory aside, Comiskey says his office will continue in its aggressive efforts to collect what is owed while at the same time trying to work with businesses to better convey their requirements under the law, much of which he says can be found on his department's website.
"The number of publications available and the information we send to people is really quite staggering. They get lots of information from us regarding what their responsibilities are and many work with accountants and those accountants clearly know what the law requires," Comiskey said.