I have a store in the diamond exchange district. I've recently come across some customers who are attempting to avoid state sales tax by having me ship their items out of state. Is this legal, or must I still charge sales tax on these transactions?
--B.D., New York, N.Y.
If your customers have their items shipped outside of New York State, those items are not subject to New York State sales tax. In fact, sales made to out-of-state customers are typically exempt from sales tax (state rules vary).
However, you should be wary of local customers asking you to ship their purchases to friends or relatives out-of-state, only to subsequently retrieve the merchandise for purposes of avoiding your state's sales tax, says Danielle Hewitt, a CPA based in Irvine, Calif. "This [practice] would be construed as fraud and would be easily detected by a sales tax audit," she notes.
CROSSING THE LINE. Alan E. Weiner, a CPA with Holtz Rubenstein Reminick in Melville, N.Y., notes that there have been some high-profile cases of art dealers and others shipping empty boxes out of state, while allowing their customers to walk out of the store with the purchased goods. "That's clearly illegal on the part of both the buyer and seller," he says. "The same is true if the seller phonies up an invoice for the buyer to an out-of-state address and messengers the item within New York State."
However, you would not bear responsibility if you don't know where your customer lives and have no reason to suspect fraud. Someone who asks you to ship a purchase out of state -- to a vacation home in Maine, say -- and brings that item back into New York State where it will primarily be used, must pay "use tax" on that item on his or her state sales income tax return.
Use tax, a state tax imposed by several states on goods purchased outside a state for which state sales tax has not been paid, is the buyer's responsibility. See New York's Taxation & Finance Department home page for more information.
DON'T INVESTIGATE. Here's the rub: What if your customer makes it clear that he or she is scheming to avoid sales tax? "If [you are] dealing with regular customers, you may very well know exactly what's happening, especially when you see the buyer's wife flashing the diamond bracelet that...you recently shipped to Maine," Weiner says. "If the seller knows the buyer's intent is to bring the item back into New York, it becomes a gray area. It's a question as to whether the seller is abetting the buyer."
Phonying up receipts or otherwise blatantly helping with the fraud is a no-no, of course. But if you simply overhear a customer talk about avoiding state sales tax, you might reasonably assume that the blowhard is only bragging about his intentions. Similarly, shipment to an out-of-state post office box or Mail Boxes Etc. might make you suspicious, but as a seller you're not required to investigate your customers.
"There would need to be other factors involved before the seller could be accused of doing something illegal," Weiner notes.
PLAY IT SAFE. The bottom line: If you don't have reason to suspect fraud, don't. And don't feel obligated to investigate your out-of-state customers' tax liability. But if a regular customer makes it clear that he's avoiding state sales tax by having you ship his purchases out of state, your best course is to refuse.
It may hurt to lose a sale in the short term, but if a state tax auditor contacts you, you'll feel like a gem turning over your above-board transaction records.