Buying a Business? Comply with New York Bulk Sale Rules to Avoid Liability

As published in the Suffolk Lawyer, a publication by the Suffolk County Bar Association.

Buyers of a business’s assets can be liable for a seller’s unpaid sales tax liabilities if the parties do not follow bulk sale rules. The purpose of these provisions is to ensure the state can collect outstanding sales tax debts. However, not all purchases are considered a bulk sale so it is crucial to understand the rules.

Bulk Sale Defined

A bulk sale is any sale, transfer, or assignment in bulk of any part or the whole of business assets, other than in the ordinary course of business, by a person required to collect tax. A business asset is defined as any asset directly related to the conduct of a business. Sales of assets made in the ordinary course of business, such as retail sales to customers, are not considered bulk sales.

Notification Requirements

Generally, bulk sale rules require the parties to an asset transfer to give notice of the pending transfer to the state taxing authority before taking possession or making payment to the seller. Notification is made by filing Form AU-196.10, Notice of Claim to Purchaser.

Notably, a seller must give all prospective purchasers Form TP-153, Notice to Prospective Purchasers of a Business or Business Assets. This form outlines the purchaser’s responsibilities in a bulk sale. However, failure of the seller to give this notification does not relieve the purchaser of its potential bulk sale liability.

Tax Department’s Response

The Tax Department has 5 business days after receiving Form AU-196.10 to notify the purchaser whether the seller owes unpaid sales tax. The purchaser will receive either:

• Form AU-197.1, Purchaser’s and/or Escrow Agent’s Release – Bulk Sale, if the seller does not have any unpaid sales taxes and an additional review or audit is not necessary; or
• Form AU-196.2, Notice of Claim to Purchaser, if the seller owes unpaid sales tax, is scheduled for a review, or is under audit.

A purchaser who receives Form AU-197.1 will not be held liable for any unpaid sales tax owed by the seller. However, if the purchaser receives Form AU-196.2, he/she must still wait because the Tax Department has 90 days to determine the extent of the seller’s liability.

Consequences of Failing to Comply

If the parties fail to properly notify the state and/or if the purchaser fails to properly withhold the purchase funds, then the purchaser may become jointly liable for the seller’s sales tax debts. However, liability is limited to the purchase price or the fair market value of the assets transferred to the purchaser, whichever is greater.

Closing the Deal

The most important point for buyers to remember is not to pay the seller until they know whether the seller owes sales taxes and if so, how much. Where there are outstanding liabilities, the buyer should place the full amount of the purchase price into an escrow account until the Tax Department completes its full review of the seller’s account. Once that is completed, any tax amount due can be paid to the State and the remaining amount to the seller.

Conclusion

Bulk sale rules are strict and unforgiving. Buyers cannot rely on assurances from the seller. They must know about and comply with these rules to ensure they will not be stuck with personal liability for the seller’s debts.