New York Rules That Purchaser of a Business is Liable for the Seller’s Sales Tax Delinquency
The New York Division of Tax Appeals held that a purchaser of a business is liable for the seller’s sales tax exposure, even when that exposure was due to the seller’s acquisition of another business.
By Tina M. Chunn, SALT senior manager
When purchasing a business, acquirers often prefer to buy the assets of such business as opposed to the stock or membership interest of the entity that operates the business because they can specify which liabilities they are willing to assume and let other liabilities remain with the seller. However, in the state tax area, there are typically two taxes that purchasers of a business will automatically succeed to by law regardless of whether the deal is structured as an asset or equity purchase: sales/use taxes and withholding taxes. We refer to this as successor liability, and it means that a state may legally assess a purchaser of a business for sales/use taxes and withholding taxes, even of those liabilities relate to a period during which the seller operated the business.
Most states have procedures by which a purchaser may relieve itself of successor liability; however, these procedures are often not followed either because they typically require providing notice to the state, which the parties may not be willing to do for fear of sparking an audit, or the deal happens too quickly and the required notices can not be made in a timely manner.
For example, in New York, purchasers in a bulk sale transaction are required to give notice of the sale to the Division of Taxation at least 10 days prior to making payment for or taking possession of the business assets. If this notice is not properly or timely filed by the purchaser prior to the bulk sale, then the purchaser becomes personally liable for the sales and use taxes due from the seller (limited to the greater of the purchase price or the fair market value of the business assets sold). A bulk sale of business assets is defined in New York as a sale, transfer, or assignment in bulk of any part or the whole of assets of a business pertaining directly to the conduct of the business, whether such assets are intangible, tangible or real property, other than in the ordinary course of business, by a person required to collect tax and pay the same over to the Department of Taxation and Finance.
On June 21, 2018, the New York Division of Tax Appeals issued a determination holding a purchaser of a business liable for the sales taxes owed by the seller. What is interesting about this case is that the seller’s sales tax liability actually arose due to successor liability from a transaction several years before where the seller purchased a business that had sales tax exposure.
While the facts are a bit convoluted, they can be boiled down as follows: Singh Restaurants (“Singh”) filed a notice of bulk sale transfer with the New York Division of Taxation (“Division”), indicating (i) a purchase of business assets by Singh from Kasmir Kitchen (“Kashmir”), (ii) that Kashmir’s last day of business was Dec. 31, 2014, and (iii) that the scheduled sale date was April 1, 2015, with the sales price of $20,000 to be held in escrow. Attached to this notice was an asset purchase agreement dated March 10, 2015, detailing the pending sale.
Several years prior, Kashmir had purchased a business, and the seller of that business had an outstanding sales tax liability of $63,623.35, for which Kashmir became liable under successor liability. Since that liability had a remaining balance of $17,558.99 at the time at Singh submitted its notice about acquiring Kashmir, the Division responded to Singh on April 23, 2015, advising Singh not to pay any part of the purchase price to Kashmir until the Division could complete its review, and that the purchase price was to be held in escrow and not released until instructed by the Division.
Singh never notified the Division whether the proceeds from the sale had been placed in escrow or were otherwise secured, and Singh never submitted the proceeds from the sale to the Division to satisfy the tax liabilities of Kashmir. Therefore, on July 9, 2015, the Division issued an assessment to Singh in the amount of $17,558.99, for the balance of Kashmir’s liability (which it succeeded to from its purchase of another business). Singh protested the assessment on the grounds it should not be subject to successor liability because it did not engage in a bulk sale transaction and that the bulk sale notification was filed in error. Singh argued that it just purchased some furniture from Kashmir and took over Kashmir’s lease, which did not constitute a bulk sale.
The Administrative Law Judge (“ALJ”) determined otherwise, pointing out that the definition of a bulk sale includes “any part or the whole of business assets, other than in the ordinary course of business.” The ALJ also noted that the purchase agreement stated that the purchase covered substantially all of Kashmir’s assets, and that the sale of assets subsequent to the closing of the seller‘s business is not in the ordinary course of business. Since Singh did not give timely notice of the bulk sale, it became liable as successor for Kashmir’s sales tax liabilities.
This case highlights the importance of state and local tax due diligence, particularly in asset deals, and especially if the seller has acquired businesses previously. In those cases, it may be necessary to inquire as to the state and local tax diligence performed on those deals to make sure that all potential tax exposures are addressed. Of equal importance is an understanding of each state’s successor liability rules and the procedures available for relief. Aprio’s SALT team has deep expertise in the SALT aspects of mergers and acquisitions, including SALT due diligence, structuring, successor liability and transfer taxes. With our assistance, you will consummate your transactions with full knowledge of any potential successor liability SALT exposures and how to mitigate them so that you realize the full value of your purchase. 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.
This article was featured in the August 2018 SALT Newsletter.
 Of course, the purchase agreement will likely specify that the purchaser has a right to be indemnified by the seller for any losses suffered in this manner, but that will not prevent the state from going after the purchaser.
 Tax Law §1141(c); 20 NYCRR 537.1(c)(2).
 20 NYCRR 537.1(a); 20 NYCRR 537.1(b).
 In the Matter of the Petition of Singh Restaurant, Inc., NYS Division of Tax Appeals, DTA No. 827456, 06/21/2018.
 Kashmir failed to properly follow the bulk sales notification rules in that transaction.
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.