I have lost count as to the number of times I have received a panicked call (from non-clients, of course) days before a transaction is about to close. The question is often the same; “What’s all this noise I hear about the bulk sales tax?”
Well, the good news is there is no additional tax added to the sale of a business or all of its assets. The bad news, however, is that states have a bulk sales notification requirement and the rules are as diverse as the states themselves.
Bulk sales rules provide a notification mechanism to the taxing authorities. It is often their last chance to collect already existing liabilities of the seller and in some jurisdictions, liabilities that arise as a result of the sale. Failure to comply with the rules can leave the buyer responsible for the seller’s tax liabilities.
Bulk sales filings are very time sensitive. Typically notification is required anywhere from ten to twenty days prior to closing, but may be even longer. The taxing authorities also have a time limit to respond, but again, this period varies. The state’s response will either give clearance for the buyer to proceed or instruct that a portion of the purchase price be withheld until clearance is given.
States are also all over the map as to what taxes are to be considered for determining what if any amount should be withheld. Some will only look to only past or present sales tax liabilities while other states will reach out to personal income tax liability of the seller’s owner.
Why wouldn’t you want to comply with the requirements, especially in light of the consequences to the buyer? As the buyer, it generally comes down to the timing of the deal and a desire to close quickly. As seller, it only draws attention to any liabilities and invites an audit.
Representatives for the buyer must alert their clients to the potential pitfalls of not complying. If the buyer insists on not following the procedures, they must be satisfied the seller is willing and capable of indemnifying them for any liabilities that later arise. Representatives of the seller typically don’t want to encourage bulk sales filings as it only alerts the states to any potential tax liability and slows down the deal. Regardless, the decisions must be a fully informed and conscious one, discussed in detail.Questions about how best to comply with bulk sales rules and avoid seller’s tax liabilities? Please contact us.
Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.