This article was originally published on AccountingWeb, 5/29/2018.
In retail sales, at least one type of sales transaction where the application of sales or use tax isn’t obvious or always occurs is when a seller makes a bulk sale of all, or nearly all, the assets of a business.
A bulk sale occurs outside the normal course of business of a seller. It may involve the sale of inventory, other assets of a business or both. In the context of commercial law, bulk sales are more specifically defined and regulated with the laudable purpose of preventing debtors from liquidating assets to avoid creditors.
In the sales tax realm, the term “bulk sale” is used to describe a broader slice of transactions; however, the sales all share a consistent theme: a bulk sale is a sale outside a seller’s normal course of business and generally involves a large portion of a business’ assets.
States View Bulk Sales in Different Ways
For accountants who offer services in sales tax compliance and reporting to their clients, it comes as no surprise that the states are not uniform in the manner they address bulk sales. Yet, one area where there is some agreement is on sales of inventory for resale. In this type of bulk sale, a purchaser who provides evidence of their reseller’s exemption makes the bulk purchase of inventory free of tax, just like any other sale for resale.
On the other hand, states view bulk sales of business assets, including inventory, for purposes other than resale in different ways. In the interest of keeping it brief, here are a few examples of the ways states view these sales to help you sort out the appropriate rules in your state. Remember, facts and circumstances are always important – and that is certainly true with bulk sales, so be cautious to avoid making blanket assumptions about any bulk sale.
A sale is exempt when an entity, required to be registered as a dealer, either distributes tangible personal property in exchange for the surrender of a proportionate interest in an entity, or transfers all, or substantially all, of the property of a person’s business, or a division thereof. See Fla. Admin. Code Ann. §12A-1.037(2).
A bulk sale is exempt if the sale consists of substantially all the assets of a business, where the seller has essentially liquidated its business operation, and where the nature of the sale is not within the course of activities for which the taxpayer is registered to collect sales tax. See Virginia Public Document Ruling No. 05/19/1983, 05/19/1983. On the other hand, a sale where less a third of a business’ assets were sold in a bulk sale was not exempt since the sale did not include substantially all of the business assets. See Virginia Public Document Ruling No. 89-307, 11/07/1989.
Bulk or isolated sales of property are not exempt from sales tax if the seller is engaged in a business and so is required to be registered with the Department of Revenue. See Wash. Rev. Code §82.08.0251.
What About Purchasing Bulk Assets?
In a sale of the majority of a business’ assets, in most states, the purchaser is required to inform the state’s revenue authorities of the sale. The notice provisions also serve to protect the purchaser from “successor liability,” where a purchaser can step into the shoes of a seller in terms of outstanding taxes owed by the seller. The bottom line is a purchaser of the bulk assets of a business wants to avoid any tax obligations associated with the seller. In addition, state notice requirements provide this assurance under most circumstances.
Besides the actual content of the required notices, purchaser notice requirement rules establish important deadlines. For example, a notice to a state must likely be made by a purchaser within a certain number of days prior to the sale. In turn, the state often has only a certain amount of time to respond. In some cases, it’s wise to consider an escrow or similar hold back of sale proceeds until the issue of successor liability for sales taxes is settled.
New York State is a great example. Here, a purchaser in a bulk sale must notify the Department of Taxation and Finance of a proposed sale by registered mail at least 10 days before taking possession or payment. Failure to give timely or proper notice may subject the purchaser, transferee or assignee to personal liability for taxes due from the seller.
The Department must notify the seller and purchaser of the amount of tax due within 90 days from receipt of notice of the sale. If the Department fails to provide this notification, the purchaser will be released from any further obligation to withhold consideration. Note the state kindly limits the potential tax bill to the amount paid for the assets or their fair market value, so even given this concession by the state, a buyer who does not notice the state of the sale can find themselves owing more for sales tax than the actual purchase price of the assets. See New York Sales Tax Bulletin, No. TB-ST-70, 06/24/2013N.Y. Tax Law §1141(c).
Given the right circumstances, selling or buying in a bulk sale scenario can be very beneficial for both parties, but these types of sales can expose sales tax traps for the unwary. Be careful of potholes and consider each sale or purchase carefully for your clients.
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