Many tax professionals who consult on transactions involving the sale of a New York business operation often overlook the state’s bulk sale notification requirements, which could represent a trap for the unwary. This article addresses those requirements.
Defining a Bulk Sale
The purchase of a New York–based business’s assets requires due diligence to assure that the transfer is free of liens or other encumbrances, for example, outstanding debt attached to machinery. Similarly, a person who acquires such assets may unknowingly become liable for unpaid sales and use taxes unless specific precautions are taken before the sale is completed. The Department of Taxation and Finance’s (DTF) bulk sale notification requirements provide the acquirer with options that may alleviate successor liability for these taxes.
Under New York tax law, the acquisition of business property may be classified as a bulk sale, which is defined as “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 and pay the same over to the Department of Taxation and Finance” [New York State Sales Tax Bulletin, TB-ST-70, 6/24/2013; 20 NYCRR section 537.1 (a)(1)]. Business assets can include anything directly related to the conduct of a business, including tangible personal property, real property, and intangible assets such as goodwill.
The phrase “ordinary course of business” generally refers to any function performed in the operation of a business. When a substantial part, or perhaps all, of a business’s assets are sold, assigned, or transferred, the transaction clearly is not “ordinary” for purposes of regular business operation, and it will be considered a bulk sale.
The following are examples of bulk sale transactions:
- ▪ A restaurant that is required to collect sales tax ceases business operations. Its fixtures and equipment are sold to an affiliated restaurant within the same ownership group.
- ▪ A corporation that is required to collect sales tax sells all of its computers and office equipment to another corporation for $6,000.
- ▪ A corporation that is required to collect sales tax transfers all of its business assets to another corporation in exchange for stock.
Conversely, the following examples cannot be defined as bulk sale transactions:
- ▪ A machine shop sells some of its obsolete machinery and purchases new machinery.
- ▪ A general merchandising store has a yearly inventory sale at below-market prices to clear its old inventory and make room for new inventory. [20 NYCRR section 537.1(a)-Definitions].
Procedures and Notification
Filing a bulk sale notification with the DTF is not mandatory, and there is no statutory requirement for purchasers to follow the relevant procedures. In many instances, however, a bulk sale notification will be advantageous. Advisors of companies engaging in or considering such purchases should evaluate the details and exigencies of the sale and the requirements of all involved parties to make this determination.
A purchaser’s liability for sales and use tax on tangible personal property acquired in a bulk sale is covered by the standard rules. Therefore, the tax is limited to the acquired tangible personal property that is not sold for resale; that is, items not sold in the normal course of business (see 20 NYCRR section 537.1, including examples). Inventory items sold in bulk for resale are notsubject to sales tax, provided the sale is properly documented with a resale exemption certificate. Furthermore, real property and intangible personal property, such as goodwill, are not subject to the tax.
If the transaction meets the definition of a bulk sale and a sales and use tax liability is likely, a purchaser may not pay the seller without following the bulk sale notification procedures promulgated by the DTF. Otherwise, a purchaser may be held liable for any unpaid or outstanding sales and use taxes owed by the seller, and the DTF may claim a first priority right and lien on the property sold. A purchaser’s liability in a bulk sale is limited to the sales price or the fair market value, whichever is greater, of the property acquired, determined on the date of the sale [20 NYCRR section 537.4(c)].
A purchaser should also notify the DTF of a pending bulk sale by filing Form AU-196.10, Notification of Sale, Transfer, or Assignment in Bulk, at least 10 days before paying for or taking possession of any business assets, whichever happens first. The form must be sent via registered mail. A seller must give a prospective purchaser Form TP-153, Notice to Prospective Purchasers of a Business or Business Assets, which outlines a purchaser’s responsibilities in a bulk sale (New York State Sales Tax Bulletin, TB-ST-70, 6/24/2013). Note that a seller’s failure to provide this form, or to advise of the bulk sale notification requirement, does not relieve a purchaser of liability for the seller’s unpaid taxes. A purchaser must also be aware of timing when mailing form AU-196.10; if the 10th day falls on a weekend or legal holiday, notice will be considered timely if given on the next succeeding day that is not a weekend or legal holiday (see Publication 20, 10/1/2007).
Within five business days after receiving Form AU-196.10, the DTF will issue to the purchaser either of the following: 1) Form AU-197.1, Purchaser’s and/or Escrow Agent’s Release—Bulk Sale, if the seller does not have any unpaid sales or use taxes and an additional review or audit is not necessary; or 2) Form AU-196.2, Notice of Claim to Purchaser, if the seller owes unpaid sales or use 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 or use tax owed by the seller, even if there are outstanding liens, warrants, or judgments against the seller for unpaid sales tax, and may pay the seller the full purchase price at the time of closing. A purchaser who receives Form AU-196.2 should not pay the seller until the DTF completes its review of the seller’s sales and use tax account; in the meantime, the full amount of the purchase price should go into an escrow account. Within 90 days of receipt of Form AU-196.2, the DTF must notify both purchaser and seller of the amount of outstanding sales or use taxes for which the purchaser may be held liable. Upon receipt of Form AU-196.2, and before closing, a purchaser may wish to consult tax or legal counsel to determine the best way to proceed with the transaction.
If the DTF does not issue Form AU-196.2 within five days of receipt of a properly executed and timely filed Form AU-196.10, the purchaser cannot be held liable for any of the seller’s unpaid sales or use taxes, unless there are outstanding warrants, judgments, or liens against the seller for such taxes.
Use Due Diligence
Whenever material quantities of assets are acquired from a person or business entity, the acquirer must exercise due diligence to avoid assuming unknown liabilities in the process. Proper compliance with New York State’s bulk sale notification rules and procedures can alleviate costly successor liability for unpaid sales and use taxes that may follow the assets purchased, transferred, or acquired. CPAs should be aware of the DTF’s bulk sales rules and procedures, and advise their clients accordingly. In all instances, purchasers are cautioned to follow the wisdom of the enduring maxim “caveat emptor”: let the buyer beware.