Two Recent New York Tax Decisions Reaffirm the Need to Make Proper Sales Tax Bulk Sales Filings
Two recent decisions, one by an administrative law judge in the New York Division of Tax Appeals, and the other by the New York Tax Appeals Tribunal, reaffirm the need to make a sales tax bulk sales filing, and highlight the unwanted results that can occur if it is either not made or made improperly.
New York, like most states, has a law that says that if the assets of a registered sales tax vendor (or a seller which is required to be registered) are purchased, transferred or assigned out of the ordinary course of business, the prospective purchaser1 must notify the Department of Taxation and Finance (“Department”) of the sale at least 10 days before. The Department then has 5 business days to mail a notice of possible claim to the purchaser, and has 90 days to notify the purchaser of the amount of any sales tax liability of the seller, or that no tax is due. The purchaser must escrow sufficient amounts from the purchase price and pay it to the Department to satisfy this liability. Failure to do so causes the purchaser to become jointly and severally liable for any sales tax obligation of the seller, up to the greater of the purchase price of the assets or their fair market value.2Compliance with the procedures results in a demand for an amount due from the purchase price paid to the seller, which when paid absolves the purchaser of any further liability for the seller’s sales tax liabilities. Non-compliance exposes the purchaser to an unknown liability which may be asserted now or in the future by the Department.
In Matter of Ultimat Security, Inc.3, no bulk sales filing was made. The owner of this security guard service was given assets, including computers, file cabinets, uniforms, a car, and a customer list, by her son, who until just before the transfer had operated a similar business called “Ultimate Security, Inc.” There was no contract of sale and no money was paid for the assets. The son became a “key contact person” in the mother’s new business and the two businesses had some customers in common. Unfortunately for the mother’s new enterprise, the son had accrued a $347,000 sales tax liability in his business. As the transferee of assets out of the ordinary course of business, the mother’s new business received a notice of determination for this amount from the Department.
The Administrative Law Judge (ALJ) rejected the mother’s argument that the bulk sales rule applied only to purchasers. The statute and regulation are clear that any purchase, assignment or transfer, even one for no consideration, can be a bulk sale. As noted, the purchaser’s liability is limited to the greater of the purchase price or the fair market value of the assets. So the mother argued she paid nothing and that the assets were old and of minimal value (their cost was $12,500); therefore, she argued, her liability was zero. The ALJ accepted the zero purchase price but held that the mother had not proven the value of the assets. Since the Department’s notice of determination is presumed correct, and the purchaser had not demonstrated that the value of the assets was less than the liability asserted, she was held liable for the full amount of tax — nearly $350,000.4
In the second case, Matter of Parvinder Singh Salh,5the purchaser of a Subway franchise filed a notice of bulk sale, but three things were wrong with it: (i) it was filed on the day of the sale (December 27, 2006), rather than at least 10 days before, (ii) it did not list the date of sale, and (iii) it listed the seller as a corporate officer of the seller rather than the true seller. However, the notice listed the actual seller’s certificate of authority number correctly, so the Department knew who the seller was. In response, the Department notified the purchaser that the seller owed approximately $3,000, and that the exact amount could not be determined because the seller was under audit. The Department requested the purchaser to submit an amended notice with the date of sale, which the purchaser did on February 16, 2007.
As a result of the audit, the Department determined that the seller owed $34,000 in sales tax, because it had reported sales on its sales tax returns in amounts less than those reported to its franchisor. The Department asserted this liability against the seller, which was adjusted downward, and, on May 25, 2007, 98 days after the amended bulk sales notice was filed, sent the purchaser a notice of determination for the unpaid balance of the amount asserted against the seller.
The Tax Appeals Tribunal held that the purchaser was liable for the taxes because he “failed to timely notify the Division of the transfer, as required by statute.” The decision does not mention that a regulation6 states that the 90 days runs from the filing of the bulk sales notice, even if it is filed late. The 90 days does not begin to run if the notice is defective as to content, but a regulation provides it does begin running if the notice is “in substantial compliance” with the statute.7The defect of the missing closing date was cured by the filing of the amended notice requested by the Department. The only other defect was listing a corporate officer, rather than the corporation, as the seller. But that error was irrelevant, because the inclusion of the correct certificate of authority number on both the original and amended bulk sales notices left no doubt as to who the seller was.8 The purchaser did not raise this issue, and the arguments it raised, including estoppel against the Department, claiming reliance on the initial $3,000 figure, were rejected.
This is a harsh result. One error in the notice was corrected and the other was immaterial. Yet that immaterial error apparently kept the period open and permitted the Department to assert a liability more than 90 days after the amended notice was submitted. The bulk sales notice, Form AU-196.10 “Notification of Sale, Transfer, or Assignment in Bulk” is a seemingly simple one-page form, requesting information about the buyer and seller, the terms of the sale, and that a copy of the contract of sale be attached. Did the Tribunal really mean to hold that an innocent error on the form that did not mislead the Department caused the 90 days to never run and provided the Department with an unlimited period to assert liability against the purchaser? Or was this issue overlooked because the purchaser did not raise it? The latter appears more likely. Decisions of the Tribunal are binding, and may be overturned only by an Article 78 proceeding which can demonstrate that the decision was “affected by an error of law or was arbitrary and capricious or an abuse of discretion.” Unless that happens, or it is limited by a subsequent case, the decision in Salh is the law.
These two recent cases illustrate some of the perils that can result from failure to file a bulk sales notice and otherwise comply with the rules for sales tax bulk sales filings. When purchasing assets out of the ordinary course of business, it is wise to consult with a tax professional with experience in bulk sales filings.
1As used here, the term “purchaser” includes a transferee or assignee of the assets.
2The sales tax bulk sale provisions thus force the purchaser to assume the seller’s sales tax liability as would occur in a sale of the business entity.
3DTA No. 822991, Division of Tax Appeals (March 17, 2011). Decisions of administrative law judges are not considered precedent and not given any force or effect in other proceedings in the Division of Tax Appeals. NYS Tax Reg. (20 NYCRR) section 3000(e)(2).
4 Decisions of administrative law judges may be appealed to the Tax Appeals Tribunal.
5DTA No. 822113 (Tax Appeals Tribunal, March 10, 2011).
6Tax Regulation (20 NYCRR) section 537.6(d) provides that if the Department “fails, within 90 days after receipt of a proper (both as to service and contents) notice of sale, transfer or assignment in bulk of business assets (whether or not such notice was timely . . . . ) to make a notice of claim for total taxes due from the seller . . . the purchaser . . . is relieved from both his obligation to further withhold such funds from the seller . . . and his liability for the taxes due from such seller . . . .”Emphasis added. Example 3 to the regulation involves a late-filed notice and concludes that the Department must send a notice of the amount of taxes that are due within 90 days.
7 Tax Regulation (20 NYCRR) section 537.2(a).
8The Department requested an amended notice of sale to include the sale date, but not to correct the seller’s name, presumably because use of the correct certificate of authority number left no doubt as to the seller’s identity.