What You Need to Know About Sales Tax and Bulk Sale Filing When Buying a Business

February 2023

People come to the United States seeking the American Dream.  To go from rags to riches.  To own your own business and excel in this open market economy.  But at the same time, what is more American than taxes? Having the opportunity to buy or sell a business is many people’s dream. But, did you know that sales tax and bulk sale filings can impact that sale?

The American Dream is inevitably wrapped up in taxes.  When buying a business, lawyers and title companies ensure all due diligence is done.  Accountants review books and records to ensure all returns have been filed, taxes paid, and no outstanding assessments exist.  However, a seldom thought of tax is sales tax.  Most buyers do not know that the New York State Department of Taxation and Finance (a.k.a. Tax Department) has an “unfiled lien” on all business assets until the business is deemed clear of all PRIOR sales and use taxes.

It is a requirement that when selling assets outside the ordinary course of business, a Notification of Sale, Transfer, or Assignment in Bulk, form AU-196.10, must be filed 10 days before such sale or transfer.  Examples of transactions considered “outside the ordinary course of business” are:

  • A contractor selling all of his tools to another contractor
  • A restaurant that is closing and selling all of its equipment to a new start up restaurant
  • A retail store selling all of its inventory to another retail store
  • A business that is required to collect sales tax, sells its business assets to Corporation A in exchange for stock in Corporation A

Some transactions that are not considered a bulk sale and no notification notice need be filed are:

  • A hardware store making a retail sale of tools and materials to a contractor
  • A delivery company trading in six of its vehicles for six new vehicles at a dealership
  • Dissolving a corporation and distributing the assets to the shareholders

Like any other important paperwork, it is recommended that the AU-196.10 be filed by certified mail return receipt.

The form asks for the buyer’s information, the seller’s information, the escrow agent if one exits, as well as the details of the sale.  The requested details of the sale include date of sale, type of property being sold, and sales price.  The Tax Department will often follow up for a copy of the contract.

Within five business days of receiving the AU-196.10, the Tax Department will either issue a release (form AU-197.1) stating the seller has no unpaid sales tax or a Notice of Claim (form AU-196.2) if the seller has (or might have) unpaid sales tax, is scheduled for review, or is under audit.  If an AU-196.2 is received all sales proceeds should be held in escrow for 90 days.  However, the question to ask is how can the Tax Department determine no sales tax is due without doing an audit?  That’s right, you guessed it.  Filing a bulk sale notice often triggers a sales tax audit.

If the buyer receives a Notice of Claim, the sale proceeds should go into escrow rather than paid to the seller until after the audit is complete.

If the Tax Department finds sales or use tax due, the sale proceeds or a portion of such proceeds can go to pay the assessment. 

However, more frequently than not, a bulk sale notice is not filed.  Either the attorney or accountant is unaware of the need to file the form, or the attorney thinks the accountant took care of it and the accountant thinks the attorney took care of it, and it gets missed altogether.

If no bulk sale filing is made, the Tax Department can transfer any sales tax assessment from the old business to the new business without prior notification.  The Tax Department can audit a business, even after it closes, and even after the assets are transferred to a new owner.  Assuming the business was filing sales tax returns, the Tax Department can look back and audit the past three years.  Once a new owner takes over, usually the new owner does not have access to the old business records.  With no records, the Tax Department will estimate sales using, for example, tax returns or bank statements or any other “reasonable method”. 

If sales tax is found to be due by the old business, the Tax Department will transfer that liability to the new business.  The new business cannot fight the transfer, but it can fight the underlying bulk sales assessment, which is difficult to do unless it can get access to the old business’s books and records.  Often such books and records are destroyed; the old owner thinking they are no longer needed once the sale is finalized.

A sales tax assessment that covers the period of the old business is a personal liability of the old owner/officer, known as the “responsible person”.  It is NOT a personal liability of the new owner/officer even though the assessment is transferred to the new business.

The Tax Department will chase both, the responsible person and the new business, until the entire liability is paid in full.  The Tax Department does not care if one pays the entire balance or if each pay a portion of it.  Although, if one makes a payment (voluntary or involuntary), it will reduce the overall balance for both parties.

Some options for a business to resolve a sales tax liability that is in collections are:

  1. Enter into a payment plan – the Tax Department will give up to a five year payment plan to pay off a tax liability.  Depending on the amount and time needed, the business is often required to submit a financial disclosure to substantiate the payment plan terms being requested.  Interest continues to accrue for the entire length of the payment plan until the balance is paid in full.  Currently, the annual interest rate with the Tax Department is over 10%.
  • Offer in Compromise – if the business can show that its liabilities outweigh its assets, and its expenses outweigh its income, the business can request that the Tax Department settle the liability for a fraction of the total amount.  However, for an ongoing business, the Tax Department usually requires that the tax amount be paid, only agreeing to waive the interest.
  • Close the business and liquidate its assets – as previously stated, a bulk sales assessment is not a personal liability of the new owner (when it covers the period of the old business).  If the new business closes, the Tax Department will try to go after any remaining assets.  If no assets exist, the Tax Department will only be able to pursue the responsible person for payment.

Not filing form AU-196.10 has severe consequences.  It should be done as part of the regular due diligence review and paperwork when buying a business.  It can save the buyer aggravation and possibly get him out of a bad deal.

-Article written by Jennifer Koo, Esq., Partner at Sales Tax Defense LLC.  Jennifer can be reached at [email protected] or 631-491-1500 ext. 16.