Buying a Business? Know New York Bulk Sale Basics

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If a business required to collect sales tax sells or transfers its business assets, the transaction is called a bulk sale. To ensure the purchaser is not held personally liable for the prior owner's unpaid sales or use taxes, rules and procedures must be followed for bulk sales in New York and most other states. The purchaser in a bulk sale transaction should not pay the seller without following these procedures.

 

Business assets may include tangible personal property, real property, or intangible assets such as goodwill. Bulk sales can involve a sale or transfer of all the business's assets or only a portion. Assets sold in the ordinary course of business are not bulk sales.

 

In New York, a purchaser must notify the Tax Department of a pending bulk sale by filing Form AU-196.10 at least 10 days before the closing. File the form by registered mail or certified mail with return receipt, or hand deliver it to the Tax Department in Albany.

 

The Tax Department must respond within five business days after receiving the form by issuing one of two responses to the purchaser: 

 

  • Form AU-197.1 (the seller has no unpaid sales taxes, and no additional review or audit is necessary). The purchaser will not be held liable for any unpaid sale tax owed by the seller. It may pay the seller the full amount of the purchase price at closing.
  • Form AU-196.2 (the seller owes unpaid sales tax, is scheduled for a review, or is under audit). The purchaser should not pay the seller until the Tax Department completes its review of the seller's sales tax account. We highly recommend the purchaser contact LM Cohen or another tax professional. At closing, the full amount of the purchase price should be placed into escrow. The Tax Department will notify both parties of the amount of sales tax due within 90 days of receiving Form AU-196.10. Remitting this amount to the Tax Department from the escrow account, with the balance going to the seller, will complete the sales transaction.

 

If the Tax Department does not issue Form AU-196.2 within five business days, or sends Form AU-197.1 in error, the purchaser will not be held liable for any of the seller's unpaid sales and use taxes and may pay the seller the full purchase price. However, any existing legal warrant or judgment against the seller for past unpaid taxes (a matter of public record that may be found in an internet search) may still subject transferred assets to liens, regardless of any bulk sale form received.

 

The purchaser should also be aware that: 

 

  • The seller's Sales Tax Certificate of Authority is not transferable. The purchaser must register and file for their own Certificate of Authority at least 20 days before beginning business.
  • Purchasers must pay sales tax on any tangible personal property purchased in conjunction with a bulk sale. Sales tax is not imposed on inventory acquired or resale, real property, or intangible assets. The tax due may be paid to the seller to be remitted with its final sales tax return or paid directly to the Tax Department.

 

Contact your LMC professional for guidance if you are contemplating the sale of your business.All our prior tax alerts are available on the Updates page of our website

 

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