Avoiding Bulk Sales Tax Nightmares

Failure to understand the sales tax implications of bulk sales transactions can have serious financial repercussions for purchasers. However, in the recently released Tax Bulletin ST-70, the New York State Department of Taxation and Finance not only clarifies the definition of the widely used term, but explains the special rules and procedures purchasers should follow with bulk sales to avoid problems later.

First of all, what is a bulk sale? The department defines it as the "sale, transfer, or assignment of business assets, in whole or in part, by a person required to collect sales tax." Such assets can be tangible personal property, real property and even intangible assets, such as goodwill, according to the bulletin. Bulk sales do not include sales made in the ordinary course of business, such as retail sales to customers.

The bulletin provides multiple examples of bulk sales: a retiring contractor sells all her tools and other equipment to another contractor. Corporations are making bulk sales when they sell business assets to another corporation in exchange for cash or stock. Even if a business owner makes a gift of assets, it can be a bulk sale.

Also listed are example of transactions that are not bulk sales. Despite the use of the word "bulk," the size of the transaction is not necessarily relevant. For example, a manufacturer who trades in six delivery vehicles to a car dealership for six new vehicles is not involved in a bulk sale. This is "ordinary course of business." In a more complex example, Corporation A purchases all the stock of Corporation B—but continues to run Corporation B as a separate legal entity. Since the assets have not been transferred in connection with the stock sale, there is no bulk sale.

Forewarned Is Forearmed in Bulk Sales
For so many tax rules, failure to follow them mean fines from the state. But failure by a purchaser to follow the tax department's bulk sales procedures carries a different kind of penalty according to the bulletin: liability for unpaid sales taxes that the seller should have paid.

To avoid problems, instructs the bulletin, bulk sales purchasers should notify the department of a pending sale by filing Form AU-196.10, Notification of Sale, Transfer, or Assignment in Bulk, at least 10 days before paying for or taking possession of any business assets. Within about a week, the department will issue one of the following:

  • Form AU-197.1, Purchaser’s and/or Escrow Agent’s Release - Bulk Sale, if the seller does not have any unpaid sales taxes and an additional review or audit is not necessary.
  • Form AU-196.2, Notice of Claim to Purchaser, if the seller owes unpaid sales tax, is scheduled for a review, or is under audit.

A purchaser who receives Form AU-197.1 will not be held liable for any unpaid sales tax owed by the seller. However, those who receive Form AU-196.2 should not pay the seller until the department has reviewed the seller’s sales tax account, according to the bulletin. The department recommends the purchaser consult with a tax professional at this time.

To protect themselves, continues the bulletin, purchasers who receive Form AU-196.2 should place the full amount of the purchase price into an escrow account, rather than paying it directly. The department will notify both purchaser and seller of the amount of sales tax due, if any, within 90 days of receiving Form AU-196.10.

At that point, says the bulletin, the purchaser may pay the amount due to the tax department out of the escrow account, up to the purchase price or fair market value of the assets, whichever is greater. The purchaser may then pay any remaining amount to the seller, which will satisfy the purchaser’s liability to the seller for the sale.

It would seem from the bulletin that most of the work for avoiding sales tax problems at a bulk sale falls on the purchaser. However, sellers do have some responsibilities: they must give all prospective purchasers Form TP-153, Notice to Prospective Purchasers of a Business or Business Assets. However, all the notice really does is explain purchasers' responsibilities. And even if the seller forgets to submit this notice, the purchaser is not relieved of its bulk sale obligations or the potential bulk sale liability, according to tax department.

The bulletin contains additional details, such as how to file Form AU-196.10, as well as references to other guidance and laws and regulations.