A few months ago I overheard a voicemail being left on our office answering machine from The New York State Department of Taxation and Finance. My first thought was “crap, this can’t be good”. They generally don’t call people to say “good job paying your taxes, keep it up!”
I called Mike, who handles our accounting, and he returned the call. Later that day we learned what I had suspected: we were being audited. Supposedly we were “randomly selected”, although I have a hunch that it’s because our second quarter taxes that we had just filed were 1) for the largest amount of income we’ve ever had, and 2) very little of that income was subject to New York sales tax because the majority of our orders are shipped to states other than NY. Of course they’d want to check everything out and make sure they weren’t entitled to a bigger piece of our revenue pie.
They gave us approximately a month to prepare for the audit. It was a lot of work. The auditor needed to see everything. Mike especially had to spend a lot of time reviewing things from years past when he wasn’t managing our accounting.
In the end though, work aside, this actually turned out to be a relatively positive experience for us. We learned quite a bit at a time when we’re still small enough to change things. It also doesn’t hurt that we “won” – New York State ended up owing us a considerable amount of money. No one likes to get audited, but if it has to happen this was kind of the best case scenario.
Anyway, I learned a lot that I think would be helpful to anyone faced with a similar situation.
A Good Accountant is Worth His Weight in Gold
Our first call was to our accountant. We were kind of freaking out. Right away he put us at ease. He told us that a lot of his clients had been audited lately (presumably, NYS, like all other states, is looking for any money they can find, and it’s hard to blame them).
He also advised us that we could give him power of attorney for this audit, moving the location from our warehouse and instead to his office. At no point would we ever have to interact with the auditor. We could just give him everything and he would take care of the rest. We jumped at this opportunity, not only because we knew he’d do a better job communicating with the auditor, but because it wouldn’t disrupt our warehouse operations for a few days.
While he was reviewing everything, he noticed something really big that we had never even considered – we were paying sales tax on our boxes and packing peanuts, but we shouldn’t have been. They are being “resold” to our customers as part of our shipping & handling charges, and are integral to the buying process (the customer can’t get their products without them being packaged). Factor in several years of packing materials, and that’s how NYS ended up owing us money. We’ve since applied for and received a tax exemption from Uline for these materials.
When we first heard that they’d owe us money, we thought it would be in the form of a credit on future taxes. Somehow he negotiated a payment instead of a credit. Again, something we never would have even known about. All in all he was worth every penny and then some! I can’t overstate how important it is to work with a good accountant.
We did get dinged on a few things, although they were more than offset by the credit we received for the packing materials.
The auditor wanted every receipt for every expense to ensure that we had been paying proper sales tax. Despite our best efforts, we weren’t able to dig everything up. I’m as guilty as anyone – there were times when I’d pick up something small like bottled water or paper towels for the warehouse guys, charge it to the company card, and then forget to file the receipt. While it’s still on the books, the auditor has no way of knowing whether I paid the appropriate tax on that sale, and therefore had to assume that we didn’t.
The other example where we owed some money was from online purchases. We made purchases from merchants outside of NY for things like computers where we weren’t charged sales tax. We should have proactively reported those purchases and paid the tax (something everyone should be doing personally as well…although most people don’t).
All in all very minor, but lesson learned going forward.
The Value of This Blog Community
There have been countless times where one of you guys has commented or emailed me in response to one of my posts and either directly or indirectly has helped us fix something we were doing wrong. This audit was probably the biggest example.
Rob: Is shipping taxable in NY? it is here, so the generally accepted norm is to put the tax after the shipping when presenting the subtotals and totals. If it’s not taxable then the way you’ve got it already makes more sense.
Me: Good question on the shipping. NYS is a small % of our orders…I’ll have to bring it up at our next meeting, probably a question for our accountant given that my googling about it just confused me. George handles paying the NYS sales tax so I’m sure he’ll have some insight too. I’d like to say that we’ve thought it through previously, and we may have, but if we did it was year’s ago and I can’t remember. Update – I decided to look at a few retailers that I purchased from to see how they charged me tax…and it was 50/50. Definitely a question for the accountant.
Me:: A quick update – Rob was correct. We spoke about the tax situation at our meeting. As a group we thought we probably were doing it right by not taxing it, but we asked our accountant and he said that in NYS you do have to charge tax on shipping. We have now changed the site now to reflect that. Thank You Rob!
Rob: Hehe, no worries. Sorry if it’s increased your tax bill!
By proactively fixing that issue we saved ourselves a BIG headache. I’ve never doubted that blogging was worth my time, but if anyone ever did, examples like this really illustrate how it has directly helped our business. Without you guys this site would just be a diary of my ramblings. Big thanks to everyone who takes the time to read, comment, and email.