When buying a business, the potential buyer will usually perform due diligence to verify information provided by seller and to search for any unknown issues and problems. One potential issue may be tax problems specifically an outstanding sales tax liability. If the business being sold owes past due sales tax the amount of this tax liability must be withheld and not paid to seller at closing. If this is not done the buyer may become liable for the sellers outstanding sales tax liability. For this reason, it is important that potential buyers inquire about sales tax liability and comply with the New York State Bulk Sale rules to avoid liability.
What is a Bulk Sale?
A “bulk sale” is a sale, transfer, or assignment of business assets in whole or in part by a person required to collect sales tax. Including: tangible personal property, real property, and intangible assets.
Seller & Buyer Responsibilities in a Bulk Sale Transaction
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, the failure of the seller to give this notification does not relieve the purchaser of its bulk sale obligations or the potential bulk sale liability.
A purchaser in a bulk sale transaction should not pay the seller without following the procedures outlined by the New York State Department of Taxation and Finance (NYSDTF). Otherwise, the purchaser may be held liable for any unpaid tax owed by the seller.
Bulk Sale Compliance
A purchaser must notify the Tax Department of a pending bulk sale by filing Form AU-196.10, Notification of Sale, Transfer, or Assignment in Bulk. After processing the form, the NYSDTF will issue either:
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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
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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.
If the purchaser is notified that the seller does not owe have a sales tax liability the purchaser is free to complete the purchase of the business. However, if the purchaser is notified that the seller does owe an outstanding sales tax liability the purchaser may still continue with the purchase of business but money should be held in escrow. Once the actual sales tax liability is determined (payoff amount) it will be paid from escrow account. The seller will then receive any remaining proceeds (proceeds less amount paid to NYSDTF to satisfy sales tax liability).
In conclusion the required bulk sale compliance is a tool to collect unpaid sales tax. If a purchaser of a business in New York is not careful or does not perform due diligence the purchaser may end up being liable for the seller’s outstanding sales tax liability.
Peter E. Alizio is a CPA, Tax Attorney, and owner of Alizio Law, PLLC. When he is not solving IRS and NYS tax problems he likes watching football and playing amateur chef. He also enjoys meeting new people, preferably over coffee, whiskey or cigars.