Summary: When purchasing a business, it is crucial to understand the state’s bulk sale tax requirements and tax clearance processes. Failure to follow these rules and procedures can leave the purchaser responsible for some of the seller’s pre-closing state tax liabilities.
Bulk sales, transfers of business assets that fall outside the ordinary course of business, can trigger specific state tax obligations for both buyers and sellers. These transactions may give rise to sales tax when transferring tangible personal property or real estate transfer tax when transferring an interest in real property. However, certain exemptions may apply, depending on the state’s specific rules, which can vary greatly.
Another critical aspect of bulk sales is that the purchaser may be required to notify the state of the transaction (and withhold funds from the seller). These requirements may be tied to the state’s successor liability provisions. In other words, failure to comply with a state’s notification and withholding requirements can result in the purchaser being liable for the pre-closing tax liabilities of the seller.[1]
The Consequences of Non-Compliance in New York
A recent decision by the New York Tax Appeals Tribunal highlights the critical importance of complying with New York’s bulk sale requirements.[2] In this case, the purchaser failed to notify the state before acquiring the seller’s assets. As a result, the purchaser was held personally liable for the seller’s outstanding sales tax debt. The Tribunal emphasized that neglecting the notice requirement not only exposes the purchaser to liability but also results in forfeiting the statutory protections designed for compliant buyers. This article examines New York’s bulk sale rule, the responsibilities of purchasers, and the implications of failing to comply.
Understanding New York’s Bulk Sale Rule
In New York, a “bulk sale” is definied as “any sale, transfer, or assignment in bulk of any part or all of a business’s assets, other than in the ordinary course of business, by a person required to collect and pay sales tax.”[3] The phrase “ordinary course of business” means “any function, operation or transaction which is done ordinarily or customarily in the course of business. All the facts and circumstances surrounding the transaction must be examined to ascertain whether the transaction is in the ordinary course of business.”[4]
What are the Purchaser’s Responsibilities?
The law places the following obligations on the purchaser in a bulk sale transaction:
- Advance Notice Requirement: The purchaser must notify the New York State Tax Commission by registered mail at least 10 days before taking possession of the business assets or making any payment, regardless of whether the seller has represented that taxes are owed or the purchaser is aware of any such liabilities.[5] The notification is made on Form AU-196.10.
- Withholding Requirement: The purchaser is required to withhold the lesser of (1) all the consideration required to be turned over to the seller or (2) the total amount due from the seller as provided in the notice of tax due provided by the state within 90 days of the bulk sale notice.[6] The regulation recognizes that:
[Since it is unlikely that the [state] will issue such a notice of total tax due prior to the sale closing, a purchaser . . . wishing to avoid derivative liability for the seller’s . . . sales and use taxes should withhold the entire consideration to be paid the seller . . . until such consideration is released by the department or any such liability is satisfied.[7]
Failure to comply with the notice and withholding requirements exposes the purchaser to liability for the seller’s pre-closing tax liabilities.
Final Thoughts: The Importance of State-by-State Variations
Every state has its own set of rules regarding successor liability and the procedures for complying with notification requirements or tax clearance requests. Purchasers should consult with their tax and legal advisors to make sure that they understand what these requirements and procedures are in order to minimize their potential exposure to the seller’s pre-closing tax liabilities.
[1] Most states impose successor liability for sales tax and withholding tax; however, there are states that expand successor liability to other types of taxes. In addition, some states impose a notification requirement, with the penalty for failure to comply being successor liability for the purchaser. However, other states may impose successor liability outright, unless the purchaser receives a tax clearance certificate. While these are slight procedural differences, the practical result is the same – failure to make the notification or request the clearance certificate will generally give rise to successor liability for the purchaser.
[2] In the Matter of Nacmias & Sons Auto Service, LLC, New York Tax Appeals Tribunal, DTA No. 830700 (Aug. 28, 2025).
[3] 20 NYCRR 537.1(a)(1).
[4] 20 NYCRR 537.1(d)(1).
[5] NY Tax Law § 1141(c); 20 NYCRR 537.3(a).
[6] 20 NYCRR 537.3(b).
[7] Id.
