What's the tax on a bagel? It depends how you slice it—or in the case of New York, if you slice it.

State tax officials, under orders from cash-strapped Albany to ramp up their audit and compliance efforts, have begun to enforce one of the more obscure distinctions within the state's sales tax law.

In New York, the sale of whole bagels isn't subject to sales tax. But the tax does apply to "sliced or prepared bagels (with cream cheese or other toppings)," according to the state Department of Taxation and Finance. And if the bagel is eaten in the store, even if it's never been touched by a knife, it's also taxed.

Will Yurman for The Wall Street Journal

That was news to one New York bagel-store owner, who found out he was out of compliance with the policy this summer when the state audited his company.

Kenneth Greene, the owner of 33 Bruegger's Bagel franchises throughout New York, says the state demanded that he start charging taxes on all bagels, except for those that remain intact and are consumed off premises, and forced him to pay a "significant" sum in taxes that the state estimated he owed.

Mr. Greene says the extra charge, about eight cents a bagel, depending on the local rate, filled his customers with boiling rage. "They felt we were nickel-and-diming them. They thought we were charging them to slice a bagel," he said.

Will Yurman for The Wall Street Journal

To clear things up, he posted signs at the cashier informing customers that it was Albany, not Bruegger's, to blame. "We apologize for this change and share in your frustration on this additional tax," the signs read.

It's unclear whether the state's crackdown will spread beyond Bruegger's, which operates nationally and in upstate New York.

"I hope they don't come after me for that," said Florence Wilpon, a founding owner of Ess-a-Bagel in Manhattan.

One source of confusion is that the rule isn't spelled out in the tax code. And while sliced bagels are subject to sales tax, a sliced loaf of bread at a bakery isn't, according to tax officials.

A spokesman for the tax department said the state "will provide additional guidance via our Web site and publications in the near future."

Write to Jacob Gershman at jacob.gershman