New York Imposes Sales Tax on Purchaser of Assets Even When Seller Committed Fraud

August 29, 2019

Buyer Beware! States generally enforce successor liability for sales tax against purchasers of a business, even in cases where the seller may have committed fraud against the buyer, as was the case in this New York Tax Appeals Tribunal decision.

By Jeff Glickman, SALT Partner

Buying a business is a big deal, no matter the size.  Purchasers spend significant amounts of time conducting due diligence in a variety of areas to make sure that they are not inheriting any liabilities, and if any are discovered, either the purchaser walks away, or the parties negotiate exactly how such liabilities will be handled.

In State & Local Tax (SALT), the successor liability rules for a purchase of assets (as opposed to an equity interest such as stock or an LLL membership unit) can come as a surprise to some since this type of deal typically allows the purchaser to obtain the business without inheriting most of the seller’s liabilities.  However, it is common for states to impose successor liability for sales/use and withholding taxes in an asset deal, and some states enforce successor liability for other state taxes as well.  In addition, there may be sales tax due on the transfer of assets.

Most states have procedures for addressing these issues that may require action both before and after the deal is closed, and the parties to the transaction need to look at the specific rules in each state and be mindful as to each party’s responsibilities, both before and after the closing.  This is especially true for a purchaser who will often be stuck “holding the bag” even where a seller does not follow through with its contractual obligations.

Consider a recent New York State Tax Appeals Tribunal decision in which a purchaser was assessed sales tax in the amount of the entire purchase price for the purchase of a business that never ended up actually being transferred.[1]

On Dec. 1, 2010, the parties entered into an agreement whereby seller agreed to sell the assets of its Popeye’s Chicken (i.e., business assets, inventory, accounts receivable and goodwill) to the purchaser for $160,000.  The agreement acknowledged that the seller had a sales tax liability of at least $200,000 and that the deal was conditioned on the seller’s payment of this obligation.  Half of the purchase price ($80,000) was delivered by check made out to “New York State Sales Tax,” which the seller agreed to remit to the state.

The purchaser began operating the business in late 2010/early 2011 and filed a New York Sale Tax return for the business for the period Dec. 1, 2010 through Feb. 28, 2011.  In January 2011, the state notified the purchaser that there was a possible claim for sales and use tax on the purchased business in an undetermined amount as well as sales tax due on the transfer of the assets in the amount of about $10,000.

In March 2011, the purchaser received an assessment for sales tax in the amount of $160,000, and the notice explained that as the purchaser, it was liable for the sale tax of the seller up to the purchase price.  The purchaser also received an assessment for approximately $10,000 for the sales tax due on the transfer of the assets.

Subsequently, the purchaser discovered that the $80,000 check had not been sent to the state but instead was converted and deposited in another business account of the seller.  In addition, neither the restaurant lease nor title to any of the equipment was ever transferred into purchaser’s name.  The seller was ultimately indicted for unlawful deception and theft.

Before the Tax Appeals Tribunal, the purchaser argued that because the assets were never actually transferred, successor liability could not be enforced.  The Tribunal disagreed, stating that a “completed transfer of title is unnecessary to impose sales tax because sales tax is defined as a tax on a transaction resulting in the transfer of title or possession (or both) of tangible personal property.”  The purchaser operated the business and used the assets for a couple of years, and this established the transfer of possession necessary for the imposition of sales tax.

Due diligence should not end when the transaction is completed, since the parties to the deal often have contractual and legal obligations that survive the closing.  This may include completing notice requirements, filing certain tax returns, and remitting payments to third parties.  Failure to make sure that these requirements are satisfied will often result in the purchaser paying the seller’s liabilities, even in cases where the seller may have committed fraud.

Aprio’s SALT team regularly conducts both buy-side and sell-side due diligence and understands not only the substantive state tax rules for successor liability, but also the procedural aspects to make sure that each party complies with its respective legal and contractual obligations.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the August 2019 SALT Newsletter.

[1] In the Matter of the Petition of Khayer Kayumi, DTA No. 825953, June 27, 2019.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.