The buyer in a “bulk sale” transaction – i.e., the sale and purchase in bulk of the whole or part of the “business assets” of a person required to collect sales tax – must file a notice of bulk sale at least ten days before taking possession of such assets or paying for them (whichever comes first).
A bulk sale is one that is made other than in the ordinary course of business. Whether a sale is other than in the ordinary course is based upon all the facts and circumstances surrounding the transaction; however, where a major part of the assets are sold, the sale is clearly not in the ordinary course and is considered a bulk sale.
“Business assets” means any assets pertaining directly to the conduct of a business, whether such assets are intangible, tangible or real property. Any asset owned by a corporation is considered a business asset.
Before a bulk sale, the seller must give each prospective buyer of the business assets a copy of the notice requirements relating to bulk sales. It should be noted, however, that the buyer is not excused from his liability simply because of the seller’s failure to provide such copy.
Prior to, or in anticipation of, a bulk sale, the seller may request, and the State may perform (in its discretion), an audit of the seller to determine its sales tax liability through the date of sale of the business assets. If such an audit is conducted, the State will issue a bulk sale certificate to the seller indicating the seller’s tax liability up to the date of the certificate. Despite the audit request, the seller will remain liable for taxes due from the seller to the State. The seller also remains liable for taxes due from him whether or not the buyer has been relieved of his obligations to pay the Seller’s taxes.
The notice to the buyer must set forth, among other things:
– The names of the seller, buyer and escrow agent, if any;
– The scheduled date of the sale;
– The total sales price;
– The allocation of the sales price among various classes of assets, including receivables, goodwill, inventory, real property, manufacturing equipment and others;
– The amount of escrow funds, if any; and
– The terms and conditions of the sale.
The notice must be given even where the seller has represented to the buyer that no sales taxes are owed.
The buyer must withhold the lesser of (i) the consideration payable to the seller, or (ii) the total tax due from the seller as contained in the notice of tax due sent to the buyer by the State. If the buyer files a proper and timely notice, and the State notifies the buyer of a possible claim for taxes due, the buyer is forbidden to pay over any funds or property due the seller (except the portion of such funds in excess of the State’s claim) until the seller is relieved of such obligation in accordance with the bulk sale rules.
Because it is unlikely that the State will issue a notice of total tax due prior to the sale closing, a buyer wishing to avoid derivative liability for the seller’s taxes should withhold the entire consideration to be paid the seller until the consideration is released by the State or the tax liability is satisfied.
A buyer who fails to provide notice of the bulk sale to the State is not released of his obligation to withhold consideration from the seller. Furthermore, failing to provide such notice will lead to personal liability for the buyer for any sales taxes owed by the seller, up to the greater of the sales price or the FMV of the business assets transferred (including intangibles).
On the other hand, a buyer is relieved if notice has been given to the State and, within five business days of receipt of the notice, the State fails to inform the buyer that there may be a claim for taxes against the Seller.
Within ninety days of the notice of bulk sale, the State will give notice to both the buyer and the seller of the actual amount due from the seller. Upon receipt of the notice, the buyer may pay the amount of the claim to the State and be relieved of all further liability with respect to such amounts to the seller.
If the State does not respond within such ninety-day period, then the buyer may release the funds to the seller. The buyer will be relieved from his obligation to further withhold such funds, and from his liability for the taxes due from the seller, except for any sales taxes due on the sale of tangible personal property (“TPP”) from the seller to the buyer.
Of course, the buyer may also release funds if the State informs the buyer that it may do so, or if the seller provides the buyer with a bulk sale certificate from the State stating that all taxes due up to the sale date have been paid.
It bears repeating that a buyer’s failure to file a proper and timely notice of bulk sale will result in personal liability for the buyer for taxes due from the seller. This liability is limited to the purchase price or the FMV of the business assets sold (whichever is greater).
It should also be noted that the buyer’s personal liability does not extend to the penalties and interest owed by the seller up to the sale date. However, penalties and interest will accrue on the buyer’s derivative liability.
Sales Tax for TPP
In addition to any sales tax liability of the seller arising from the seller’s historical operations, the buyer and the seller must also consider the sales tax that will be imposed upon the sale of TPP as part of the bulk sale, excluding TPP sold for resale (like inventory) and TPP that is exempt from sales tax (like manufacturing equipment), provided proper exemption certificates have been produced.
Of course, the tax is not imposed upon any real property or any intangible personal property (such as goodwill or accounts receivable).
…Stay tuned for Part III, The Income Tax Impact of Sales Tax!