Successor Liability in a New York Bulk Sale: What Every Buyer Must Know

In New York state, a sale of assets related to a business which is required to collect sales and use tax from its customers could qualify as a “Bulk Sale”, when such sale is not in the ordinary course of the business. In such transactions, the acquirer of the business assets (“Acquirer”) must consider the possibility of successor tax liability, i.e., the tax liability passing on from the seller/previous business owner(“Seller”) to the Acquirer. One particular area that demands special attention in this regard is the passing of Seller's unpaid sales and use tax liability to the Acquirer under the New York Tax Law § 1141(c) (“Bulk Sale Rules”). As per the Bulk Sale Rules, the Department of Taxation and Finance (“DTF”) has the authority to hold an Acquirer liable for the Seller’s unpaid sales and use taxes in certain cases.

 

This makes it crucial for the Acquirer to identify the existence of any unpaid sales and use tax liabilities early on in the transaction. For this, the Acquirer must file a Notification of ‘Sale, Transfer, or Assignment in Bulk’ in Form AU-196.10 with DTF at least ten (10) days before the earlier of closing or the date of taking possession of the business asset transferred (ideally even earlier) (“Notice”). Once filed, DTF will respond within five (5) business days whereby it will either clear the transaction for closing if there are no outstanding taxes or instruct the Acquirer to withhold the entire purchase price in escrow until any Seller’s unpaid liabilities are satisfied. To clarify, any clearance received from the DTF in response to the Notice, or any settlement of outstanding dues pursuant to such DTF communication, will not release any pre-existing tax lien on the assets acquired pursuant to a judgement or warrant against the Seller for past unpaid taxes. These must be addressed separately. Hence, for the purpose of Bulk Sale Rules, an Acquirer’s diligence process is twofold, first, through the Notification process mentioned here, and second, through determination and addressing of any pre-existing judgements or warrants for unpaid sales and use tax. On a side note, if the Acquirer intends to continue operating a business that makes taxable sales, they must obtain their own Certificate of Authority which is an authorisation to collect sales tax at least twenty (20) days before beginning business operations, as the Seller's certificate cannot be transferred.

 

Acquirers often negotiate strong contractual protections, assuming these will shield them from the Seller’s past tax obligations. While careful drafting is essential, it is equally important to understand that contractual provision will not completely absolve Acquirer from liability under Bulk Sale Rules. In other words, any language in the transaction agreement(s) such as “seller is solely responsible for all past tax dues” which is backstopped by relevant indemnities, may provide contractual remedies but will definitely not shield the Acquirer from DTF proceedings and potentially personal liability under Bulk Sale Rules. Therefore, it is highly recommended for the Acquirer to consult their attorney for navigating through such nuances.

 

Our team at Capex Legal, regularly advises on asset transfers of New York based businesses, feel free to reach out to us in case you have any concerns regarding your asset transfer transaction.  

 

This article is provided for general informational purposes only and does not constitute legal or tax advice. Readers should consult with qualified legal and tax professionals before taking decisions in respect of the Bulk Sale Rules.