Among the traps for the unwary are the bulk sale provisions under the New York State sales tax. They provide that a bulk sale purchaser notify the Department in advance of a “bulk sale” and withhold from the purchase price the amount of any sales tax that the Department claims that the seller owes. Failure to adhere to those procedures can result in personal liability by the purchaser for the seller’s pre-existing sales tax liabilities. A recent Administrative Law Judge decision is a reminder that sometimes it may not be apparent that a bulk sale of assets has even taken place. Matter of Werner Boys, Inc., d/b/a Werner Boys Glass & Mirror, DTA No. 825530 (N.Y.S. Div. of Tax App., Feb. 19, 2015).

Facts. Until January 2009, Werner Glass, a closely- held corporation owned by William O. Werner, Sr., operated a glass and mirror installation business in St. James, New York. Another company, Werner Boys, Inc. (the “Purchaser”), a closely-held corporation owned by William Werner Jr., the son of William Sr., conducted a similar glass business in Lake Grove, New York.

Werner Glass discontinued its business and dissolved on December 31, 2008. In or about January 2009, Purchaser moved into the business premises formerly occupied by Werner Glass, even taking the same phone number. The following month, two motor vehicles owned by Werner Glass were transferred to the Purchaser. Several former employees of Werner Glass became employees of the Purchaser. The Purchaser’s sales tax receipts rose dramatically beginning in 2009.

Following its dissolution, Werner Glass was audited by the Department, resulting in an assessment of additional sales tax due for the period March 1, 1998 through February 28, 2009, which appears to have become a final assessment against the defunct corporation. In February 2012, after requesting but not receiving a notification of bulk sale, the Department issued a Notice of Claim to the Purchaser for sales tax owed by Werner Glass. After concluding that a bulk sale of assets had occurred, the Department assessed Purchaser as a bulk sale purchaser for the outstanding sales tax liabilities of Werner Glass.

Bulk sale provisions. Generally, the purchaser of business assets in a bulk sale transaction must notify the Department of the sale at least 10 days before taking possession or making payment to the seller. The Department then must timely inform the purchaser of any sales tax that may be owed by the seller of the business. If the purchaser fails to withhold funds from the seller sufficient to pay the seller’s sales tax liabilities, the purchaser can be personally liable for those liabilities, limited to the greater of the purchase price or the fair market value of the business sold or transferred.

The term “bulk sale” is defined as “any sale, transfer or assignment in bulk of any part of the whole of business assets, other than in the ordinary course of business . . .” 20 NYCRR 537.1(a)(1). It includes a transfer by gift (20 NYCRR 537.1(a)(3)) or the assumption of indebtedness. The term “business assets” includes “any assets of a business pertaining directly to the conduct of the business, whether such assets are intangible, tangible or real property,” and any assets owned by a corporation. 20 NYCRR 537.1(b).

Issues. The first issue in dispute was whether there was a bulk sale of business assets in the first place. Purchaser claimed that no bulk sale had occurred, contending that the only assets transferred were two vehicles. The Department maintained that, since the same glass installation business continued, simply moving over to the Purchaser in a transaction that was not conducted at arm’s length, the burden of proof was on the taxpayer to prove that a bulk sale did not occur and to prove the valuation of the business assets purchased. If a bulk sale had occurred, the issue then became whether the Purchaser limited its transferee liability by proving that the fair market value of the assets transferred was less than the sales tax liability being asserted.

ALJ Decision. The ALJ held that a bulk sale had occurred and that, in the absence of proof regarding the fair market value of the assets transferred or the actual purchase price for the business, Purchaser was liable as a bulk sale purchaser for the full amount of the seller’s sales tax liabilities. The ALJ found that not only two vehicles were transferred to the Purchaser, but other business assets were transferred as well, including the seller’s customer base and goodwill. This was apparent because Purchaser’s sales tax receipts rose dramatically after Werner Glass dissolved, which suggested that Purchaser had acquired Werner Glass’ customer base, an intangible business asset. The fact that there was no contract of sale or money exchanged for the assets transferred between the related parties was not relevant in determining whether a bulk sale took place.

While the Purchaser sought to limit its liability based on the value of the assets transferred, it provided no third-party information regarding the value of the vehicles or any evidence of the value of the customer lists and goodwill. The ALJ also noted that the seller and purchaser were related parties, suggesting that for all practical purposes the Purchaser was merely a continuation of the business of Werner Glass. The ALJ held that the burden of proof was on the Purchaser to prove that no business assets had been transferred and to prove the valuation of the business assets found to have been transferred, and concluded that the Purchaser had failed to meet that burden. Accordingly, it was held liable for the seller’s sales tax liabilities.

Additional Insights

The decision highlights the fact that when a purchaser acquires or otherwise takes over another business — even a business with minimal tangible business assets — it may be acquiring valuable intangible business assets, and the transfer of those intangible assets can also constitute a bulk sale under the sales tax. This may not always be apparent to the purchaser of a business, making it incumbent on the purchaser seeking to limit its sales tax exposure to err on the side of caution by filing a notification of a bulk sale with the Department. The decision is also a reminder that the limitation on the bulk sale purchaser’s liability is the greater of the purchase price for the business assets or the fair market value of those assets. In this case, once it was determined that business assets had been transferred, the burden remained on the Purchaser to prove the value of those assets in order to limit its liability. Admittedly, this case engendered heightened scrutiny since the transaction was between related parties, and the Purchaser appeared to have continued the seller’s business after the asset transfers.