The implications of New York State’s guidance on bulk sales may have far-reaching consequences and could result in personal liability for the “buyer” – even in a transfer that is technically not a “sale.”
In June of 2013, nearly 30 years after New York issued its seminal guidance on bulk sales in TSB-M-83(6)S and during which period the State issued minor guidance on the topic, New York State issued a new technical bulletin TB-70 regarding bulk sales. In this bulletin, the state spelled out what transactions are considered “bulk sale” transactions for sales tax – and that guidance is disconcerting.
If a transfer or transaction is deemed a bulk sale and the “purchaser” does not precisely comply with the state’s notification requirements, that purchaser can be held personally liable for any unpaid sales tax owed by the “seller.”
To better understand this, it helps to understand the nuances of what constitutes a “bulk sale” for New York State sales tax.
What is a Bulk Sale?
According to Regulation Section 537.1, the term “bulk sale” means 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 it to the Department of Taxation and Finance.
The more recent technical bulletin clarifies the definition by stating that:
The sale, transfer, or assignment of business assets, in whole or in part, by a person required to collect sales tax is called a bulk sale. Business assets means any assets directly related to the conduct of a business, including:
- tangible personal property
- real property, and
- intangible assets, such as goodwill.
(Sales of assets made in the ordinary course of business, such as retail sales to customers, are not considered bulk sales.)
Should a transfer be considered as a “bulk sale” for sales tax by the state, a purchaser must notify the state 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.
Per state procedures, within five days after receiving the form, the Tax Department will issue to the purchaser either:
- Form AU-197.1, Purchaser’s and/or Escrow Agent’s Release – Bulk Sale: This will be issued only 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: This will be issued if the seller owes unpaid sales tax, is scheduled for a review, or is under audit.
As set forth in the recent technical bulletin, a “purchaser who receives Form AU-197.1 from the Tax Department will not be held liable for any unpaid sales tax owed by the seller.”
Most importantly, as indicated in TB-70 , “[a] purchaser who receives Form AU-196.2 should not pay the seller until the Tax Department completes its review of the seller’s sales tax account.”
Absent the timely filing Form AU-196.10 and receiving Form AU-197.1 back from the State, the purchaser may have successor liability arising from the purchase.
Guidance, Clarification or Warning?
The examples the state provides lists relatively innocuous transactions, even those that may be otherwise exempt from sales tax, as still possibly giving rise to a “bulk sale.”
In the excerpt below, pay attention to the state’s clarification of what transfers will fall under the “bulk sale” sales tax disclosure requirements. Essentially, this bulletin highlights transactions that in the past may have been glossed over by the state as possibly not within the realm of “bulk sale” sales tax disclosure. They are now squarely in the state’s crosshairs.
The following is taken directly from TB-70 and demonstrates some of the transactions they consider as a bulk sale trigger:
- A restaurant that is closing sells all of its fixtures and equipment to a person opening up a new restaurant.
- Corporation C, which is required to collect sales tax, transfers all of its business assets to Corporation D in exchange for stock in Corporation D.
- Corporation E, which is required to collect sales tax, sells its entire inventory to Corporation F, which intends to resell the inventory.
- Mr. Smith, a person required to collect sales tax, makes a gift of all of his business assets to another person.
“Caveat Emptor” –Bulk Sales Is Not Limited to Just “Buyers”
Is TB-70 simply guidance by the state or is it a warning that the State has a renewed interest in bulk sales tax filings and successor liability? Any party to a transfer of business assets not ordinarily transferred in the course of one’s business should heed “Caveat Emptor – Buyer Beware.”
A careful review of the state’s examples indicates that even the formation of a joint venture entity, LLC, partnership or corporation, could be viewed as a “bulk sale” by New York State resulting in exposing you to personal liability for the sales tax of one or more of your co-joint venture parties. For this reason, it’s crucial that “buyers” or transferees seek timely tax advice on all business asset transfers.