A recent New York Division of Tax Appeals determination highlights an important difference between how the state can calculate tax due during an audit and how a taxpayer must support a refund claim. In Matter of Townhouse Builders Inc., the taxpayer was a general contractor that primarily performed capital improvements. The company was not registered to collect New York’s sales tax and had not filed sales tax returns because it maintained that its work was mainly non-taxable and that it paid sales tax on its purchases.
In 2021, the New York Division of Taxation (Division) audited the taxpayer and determined that the company had adequate records after the parties agreed to use a test period methodology. The selected test period was January 2019 through February 2020, which the auditor determined was representative of the taxpayer’s business activity. The auditor used the test period results to calculate error rates and project additional tax across the audit period. The final assessment was approximately $9,421 plus interest.
Later the taxpayer filed a refund claim for approximately $260,000, arguing that the same test period approach should be used to project its overpaid tax. The Division took a different approach. It separated the refund claim from the audit and requested detailed documentation for the entire refund period, including proof that the sales and use tax being claimed had been paid and documentation establishing that tax was not due on the underlying purchases. The taxpayer declined to provide additional documentation and maintained that the refund should be determined using the same test period methodology used to calculate additional tax during the audit. The Division ultimately denied the refund claim.
After, the taxpayer filed a petition with the New York Division of Tax Appeals protesting the refund denial. The Administrative Law Judge agreed with the Division. Under New York law, a refund must be supported with documentation showing the basis and amount of the claim. There was an interesting exception. Before the hearing, the Division agreed to allow a $60,564.44 refund. Although the decision noted that the calculation of this amount was not completely clear, the Administrative Law Judge allowed it because the Division had already conceded the refund.
The decision highlights an important issue for businesses undergoing a New York sales and use tax audit that a test period may be used to calculate tax due, but businesses should not assume that the same method can be used to calculate a refund. Businesses should identify potential overpayments early in the audit process and understand how refunds and credits will be handled before signing a test period agreement. Additionally, taxpayers should maintain documentation showing that the tax was actually paid and why they are entitled to a refund.
(Matter of Townhouse Builders Inc., DTA Nos. 831580 and 851292, New York Division of Tax Appeals, September 10, 2026)