My New Friends, The Sales tax Auditors

… or what I’ve learned being Audited for NY Sales Tax

(this really need a picture, I will get a shot of them when they vist next month…)

Well straight up, New York is looking for money, no shit, they are looking to squeeze cash out of every small business, why, we are the low hanging fruit. We don’t have the high priced lawyers and tax accountants that will cost them hundreds or thousands of hours to audit. We are all about doing, creating, making, delivering good stuff for our clients and tend to neglect the “official” crap, and quite frankly that is what makes us the innovative group we are. We are about creativity, not about bureaucracy. When the government comes knocking, most people get scared shitless and roll. Fortunately (not) I have had the pleasure of a federal tax audit many years ago, and yes I was scared shit of what was going to happen, then in walks a 20 year old person (I was only 26) her first month as an auditor, me and my accountant walked all over her. I still had to pay a few thousand dollars in taxes, fines and penalties, oh and yes more in accountant fees but it was a valuable lesson. One the government does not have first string players, nor second, maybe third, so you have to plan accordingly. Two, document. It is after all like a game of poker, only show the hand they are dealing and never never show your cards first. Three, hmm that is a secret, twitter me for that one.

So cut to today. I not only had the auditor, a very nice woman, but also her boss. To start, he pulls out a printout of another company saying it is us and that we sell software. We tell him that’s not us, pull up their website and compare it to ours, make printouts… he still won’t admit his mistake. He fixates on the fact that he believes we sell software that allows people to create websites, I repeatedly inform him that we are a 100% service based company and do not have any type of packaged software (meanwhile remember he has no idea what software is or what the internet is). He is fixated on the fact that the Fusebox website does not say we are a “web development company”, I attempt to convince him that while that is the core of our business it’s not something that we would advertise, we are after all not godaddy, we are an interactive agency…glossed over eyes.

After a couple of hours he drops that angle and decides that we must be hiding something, somewhere and wants all of our purchase receipts. He is looking for anywhere we may not of paid use taxes. Does anyone know what a use tax is? Well let me explain. Remember when you bought your first car, and you went to DMV you had to pay taxes on the purchase of the car (assuming it was a used car, like my first car). The old way States dealt with use taxes was only on large purchases that was somewhat controlled by a state agency. Well now they require you to take on that responsibility. So every purchase you make (living in NY) business or personal you must now record all of the use taxes. What that means: all your Amazon, Zappos, ebay, moo cards, etc that you purchase, you have to maintain a record of the taxes you should of paid had they charged you as if you/they were based in NY. You are then required to pay that dollar amount on your year end filing, sweet.

Oh and if you happen to buy something from out of state (let’s say New Jersey) (maybe some awesome wine from Wine Library) you must pay the difference in the tax that that same product would of cost in NY. Wow an accounting nightmare.

So what to do, REVOLT,

ok we don’t have time, after all we are creating the next internet

What to watch out for:

What is you business, if you are like Fusebox, a consultancy, make sure that your contracts are not only written by a lawyer, but reviewed by a tax attorney, yeah I know that’s expensive, my audit so far has cost me $30k (that’s a lot of MacBook AIR’s, and that’s just accountant fees, you figure it out). (The Audit dude  is totally fixated on one word in my contracts, “license”)

Your website should explain somewhere. in plain English, non eloquent marketing speak (after all you dealing with a bunch of idiots) exactly what you do. (I was shocked that they actually looked at my website, yet had no idea what we did), (hmm, need to think about that)

If you are a service company, like Fusebox, you don’t have to pay taxes on any piece of equipment that generates your core product. (ie. laptops for coders, designers, architects), it gets more grey when you talk about business development and even lighter grey for management)

Internet purchase, yup record them all, factor in the taxes, and weight the risk of not paying it (I for one don’t think we should)

If you make a cdrom, dvd. or send something to a printer (brochure, biz cards, tshirts), collect taxes on it and pay it

And most of all remember, your are so much smarter that the auditor, be humble, kinda shy, this is a poker game that if lost will cost you thousands if not tens of hundreds of thousands, they are regular people doing their job, help them, (wink) to help yourself

Be nice, no fear and smile as they stick it to you

Say Thank You

Part two to this post will be what do I do if I am creating a destination site, or a SaaS business, stay tuned, as I learn so will you.

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