On the purchase of an ongoing business, many people are unaware of the potential sales tax exposure, not only the sales tax due with respect to the sale of the assets to the buyer, but also the uncollected or unpaid sales tax liability attributable to the business conducted by the seller in prior years. Several states, including New York,1 have bulk sales liability provisions, whereby a transferee of part or all of the assets of a business is obligated to provide a bulk sales notice to the state, and to withhold all or a portion of the purchase price to pay such withheld amounts to the state in satisfaction of past sales and use taxes.2 A failure to provide adequate notice to the state and withhold funds makes the transferee personally liable for the transferor’s unpaid sales and use taxes.
The bulk sales notice and withholding provisions create substantial delays in completing sales of businesses. As a result, the parties are reluctant to comply with the requirements. In many cases, the buyer of a business is dealing with a seller with substantial resources and may reasonably rely on the seller’s indemnity as protection against the risk of loss. However, in those cases where the seller is unable or unwilling to satisfy its obligations (including any indemnity), the bulk sales provisions may result in the buyer paying far more than expected. If the transferee has paid little cash consideration, because the assets acquired are subject to third-party debt, the buyer may not have sufficient funds to cover the bulk sales tax exposure. It is important that parties to an acquisition pay attention to these rules, and protect themselves to limit liability.
New York Provisions
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