The buyer of an existing business must determine whether to purchase the stock of the business entity or to purchase the assets of the business. The factors to consider include both non-tax and tax-related advantages of each transaction structure. The advantages of an asset purchase may include (i) avoiding hidden liabilities, (ii) stepped-up tax basis in assets, and (iii) amortization of goodwill. The advantages of a stock purchase may include (a) no need to retitle assets, (b) obtaining non-assignable contracts, permits, and licenses, and (c) avoiding sales or transfer taxes. If the transaction is structured as an asset sale (also known as a bulk sale), the buyer must determine the sales tax implications.
An asset purchase in New York raises two sales tax concerns:
Can the buyer become liable for the seller’s unpaid sales tax liability?
Is sales tax due on any of the particular assets being purchased?
Bulk (Asset) Sales and Successor Liability For Unpaid New York Sales Tax
New York defines a bulk sale as “any sale, transfer or assignment in bulk of any part or the whole of business assets, other than in the ordinary course of business.” Purchasers and donative transferees may be liable for the seller's unpaid sales tax liability up to the greater of (i) the selling price of the assets, or (ii) the fair market value of the assets. This successor liability rule may be imposed on the purchase of tangible assets, intangible assets, and real property. Thus, the bulk sale of assets not otherwise subject to sales tax (e.g., real property) may trigger successor liability for sales tax.
The buyer may avoid successor liability by complying with all of the following bulk sale notification requirements:
At least ten days before paying for or taking possession of the assets, the buyer must send (via registered mail) to the New York State Department of Taxation and Finance a completed Notification of Sale, Transfer, or Assignment in Bulk (Form AU-196.10).
Within five business days of receiving the Form AU-196.10 bulk sale notification, New York will issue to the buyer either (i) a Purchaser’s and/or Escrow Agent’s Release - Bulk Sale (Form AU-197.1) indicating that the seller has no unpaid sales tax liability and additional review or audit is unnecessary, or (ii) a Notice of Claim to Purchaser (Form AU-196.2) indicating that the seller has unpaid sale tax liability or is selected for additional review or audit.
If the buyer receives Form AU-197.1, the purchase may pay the purchase price and take possession of the assets without concern for the seller’s unpaid sales tax liability.
The Buyer will not be held liable for the seller's unpaid sales taxes and may pay the seller the full purchase price if the Department of Taxation and Finance (i) fails to issue the buyer Form AU-196.2 within five business days after its receipt of a properly-completed and timely-filed Form AU-196.10, or (ii) incorrectly sends the buyer Form AU-197.1 stating that the seller has no outstanding sales tax liability.
In the event the buyer receives Form AU-196.2, in order to avoid potential successor liability, the buyer must neither pay the seller nor take possession of the assets until New York completes its review of the seller’s sales tax account. Within ninety days of its receipt of Form AU-196.10, the Department of Taxation and Finance must notify buyer and seller of the actual amount of the seller’s unpaid sales tax liability.
Notably, regardless of whether the buyer receives Form AU-197.1 or AU-196.2 from the Department of Taxation and Finance, if there are outstanding tax warrants or judgments against the seller for past unpaid taxes, the assets purchased from the seller may still be subject to the Department's liens.
New York Sales Tax Applicable to Purchased Assets
Most states that impose a sales tax provide some form of “occasional or isolated sale” exemption that applies to asset sales and other transactions outside the regular course of the seller’s business. New York, however, does not provide such an exemption. Accordingly, asset purchases in New York may be subject to sales tax.
In order to determine whether sales tax is due on the purchase of particular assets, a buyer must consider applicable sales tax exemptions. Such exemptions may include inventory purchased for resale, property (e.g., equipment, machinery, and certain tools and supplies) used in the production of tangible personal property, packaging materials, and promotional materials. Thus, as part of its due diligence, the buyer in a New York asset purchase should thoroughly review with its tax expert New York's sales tax exemptions.