New York Sales Tax Audit & Compliance Guide for Businesses

If you’re doing business in New York, navigating the state’s sales and use tax system is essential to staying compliant and avoiding costly penalties. Whether you’re a local retailer, remote seller, service provider, or large manufacturer, understanding how New York sales tax works—and how audits are conducted—is key to protecting your business.

This guide provides a complete overview of New York sales tax rules, registration requirements, common audit issues, and what to do if you’re facing a tax investigation or dispute.

Do You Need to Collect New York Sales Tax?

Businesses are required to collect and remit New York sales tax if they have nexus in the state. Nexus is a legal term that means a business has a sufficient connection to New York to be subject to its tax laws.

Common ways to establish nexus in New York:

• Physical Presence: Owning or leasing property, maintaining an office or warehouse, or having employees or agents operating in the state.
• Economic Nexus: Over $500,000 in annual sales and more than 100 transactions with NY customers.
• Affiliate Nexus: Partnering with another business that helps develop or maintain your market in New York.
• Click-Through Nexus: Earning referrals from NY-based affiliates who link customers to your website.

What Is Subject to Sales Tax in New York?

New York imposes sales tax on most tangible personal property and certain services, unless a specific exemption applies. The base sales tax rate is 4%, but local jurisdictions can add as much as 4.875%, bringing total rates up to 8.875% or more.

Taxable items include:

• Clothing and footwear over $110
• Electronics, appliances, and furniture
• Restaurant meals and drinks
• Hotel and motel accommodations
• Prewritten software and digital products

Exempt items include:

• Grocery items for home consumption
• Prescription medications
• Sales for resale (with a resale certificate)
• Certain clothing under $110

Sales and Use Tax Filing Requirements

Once registered, businesses must file regular sales and use tax returns through New York State’s Online Services portal.

What Is Use Tax and When Does It Apply?

If you purchase taxable items from outside New York without being charged sales tax, you’re generally responsible for reporting and paying use tax. This includes online purchases of business equipment, software, or supplies from unregistered vendors.

What Triggers a New York Sales Tax Audit?

The NY Department of Taxation and Finance uses data analysis, whistleblower tips, and compliance patterns to initiate audits. Triggers include:

• Sales reported to the IRS that don’t match NY sales tax returns
• Frequent or excessive refund requests
• Industries with known compliance issues (restaurants, contractors, auto dealers)
• Anonymous complaints or competitor tips
• Out-of-state businesses with NY economic nexus

Industries Frequently Audited in New York

• Restaurants and Bars
• Construction Contractors
• Automobile Dealerships
• E-commerce and Amazon/Etsy Sellers
• Retailers
• Health Care Providers

The New York Sales Tax Audit Process

Audits follow a structured process, usually covering the past 3 years:

1. Notice of Audit: Request for documents and sales data
2. Fieldwork: Auditors review bank records, ledgers, and returns
3. Sampling: A short audit period is projected across 3 years
4. Preliminary Report: You get a chance to respond to findings
5. Assessment: Final notice of taxes, penalties, and interest due

Defending a New York Sales Tax Audit

To prepare a strong defense:

• Hire a qualified sales tax attorney or CPA early
• Only provide documents that are requested
• Keep complete exemption and resale certificates
• Push back on improper sampling or audit methodology

Options If You Owe Tax

New York offers a Voluntary Disclosure Program that allows businesses to come forward and pay past due tax with reduced penalties if they do so before getting audited.

Disputing an Audit Assessment

If you receive a final Notice of Determination, you can file a formal protest within 90 days, request a Conciliation Conference, or file an appeal with the Division of Tax Appeals. Representation is strongly recommended.

FAQ: Common New York Sales Tax Questions

Do I have to collect sales tax as an Amazon or Etsy seller in NY?

Yes, if your sales exceed $500,000 and involve more than 100 transactions with New York customers annually.

Are services taxable in New York?

Some services are taxable, including installation, repairs, and hotel occupancy. Professional services like legal or accounting work are generally exempt.

Can I be audited for use tax in New York?

Yes. Use tax compliance is a common focus in audits, especially for out-of-state purchases or equipment transfers.

How long should I keep sales tax records?

At least three years, though keeping them for six is safer—especially for exemption and resale certificates.

What are the penalties for failing to collect sales tax?

You can be liable for the full unpaid tax amount, interest, and penalties. Criminal charges can apply in cases of fraud or willful evasion.