Many states have adopted bulk sale laws that may hold a purchaser in an asset sale liable for a seller’s unpaid state tax liabilities. Indeed, approximately forty states currently have bulk sale laws that are intended to minimize the risk that a seller will sell some or all of the company’s assets without paying its outstanding state tax liabilities.1 Under these laws, a purchaser may be held liable for multiple types of state taxes (e.g., sales and use taxes, corporate income taxes, property taxes) that remain unpaid by the seller. Furthermore, the amount of unpaid taxes for which a purchaser may be held liable can, in some cases, exceed the purchase price of the assets acquired.

When acquiring another business, purchasers may perceive an asset purchase (rather than a stock purchase) to be a good way to minimize the amount of state tax liabilities that the purchaser will inherit. Although this may be true, purchasers often must comply with procedural requirements in multiple states in order to ensure that the seller’s unpaid state tax liabilities are not transferred to the purchaser along with the assets. If these requirements are not met, the purchaser may be liable for a variety of unpaid state taxes.

The principal procedural mechanism used by many states to provide protection to purchasers is a bulk sale notice. The bulk sale notice alerts the state to the asset transfer. It also allows the state to review the seller’s tax history and issue the purchaser a tax clearance certificate, which may serve as a complete defense from a future assessment against the purchaser of the seller’s tax liabilities.

Our experience has been that with careful, timely planning and due diligence, a purchaser may affirmatively use the bulk sale laws to reduce significant state tax uncertainty. In this article, we will discuss: (1) a purchaser’s potential state tax liability under states’ bulk sale laws; (2) the bulk sale notice and filing procedures employed by states that enable a purchaser to achieve increased certainty regarding a seller’s unpaid state tax liabilities; and (3) other special issues related to states’ bulk sale laws.

Potential State Tax Liability

Bulk sale laws generally require an asset purchaser to withhold from the purchase price an amount equal to the seller’s unpaid state tax liabilities, including penalty and interest. If not withheld, the purchaser will be liable for the unpaid liability.2 The following describes: (A) the amount of tax for which a purchaser may be liable; (B) the types of taxes for which a purchaser may be liable; (C) the states in which a purchaser may be liable for unpaid state taxes; and (D) what sales may result in the application of a state’s bulk sale law.

Amount of Potential Liability

The amount of liability that a purchaser may inherit varies by state. Some states limit a purchaser’s liability to the amount of the purchase price.3 Thus, a purchaser could end up paying twice for the same assets – once to the seller and once to the state. However, if several states are involved, the potential liability could be several times the purchase price.

To make matters worse, in some states the liability for unpaid taxes may exceed the purchase price of the purchased assets, thus further increasing the cost ultimately paid for the assets.4 For example, Arizona holds a purchaser liable for the seller’s unpaid Arizona taxes, with interest and penalties, and does not limit the purchaser’s liability to the amount of the purchase price.5 Similarly, Louisiana does not limit the purchaser’s liability and holds a purchaser liable for the seller’s unpaid Louisiana sales tax obligation, including the interest and penalties accrued.6

Taxes for which a Purchaser May Be Liable

Traditionally, state bulk sale laws only applied to sales and use taxes.7 That remains true in some states, such as New York.8 However, several states have enacted statutes that have expanded the purchaser’s potential liability to include additional taxes. For instance, New Mexico’s bulk sale law applies to all New Mexico taxes with the exception of the personal and corporate income taxes.9 Some state bulk sale laws apply to all taxes that the state imposes.10 Furthermore, many state laws hold a purchaser liable for accrued interest and penalties on unpaid taxes.11

Holding a purchaser liable for more than just sales and use taxes presents unique challenges for purchasers, especially when acquisitions are on a tight deadline. In Pennsylvania, for example, the purchaser is liable for the seller’s sales tax and corporate income tax liabilities through the date of the sale if at least 51% of the assets of the business are sold.12 From a sales and use tax perspective, the seller may be able to readily estimate potential liability by identifying all taxable sales up to the date of the asset transfer. The requirement to file quarterly tax returns helps facilitate the determination of potential liability for periods throughout the year. However, computing the seller’s income tax liability up to the date of a sale can be more difficult. The corporate income tax return is filed on an annual basis and the seller may have difficulty determining the income tax liability for the partial year. In such cases, the Pennsylvania Department of Revenue allows taxpayers to estimate the amount due, but the Department may assess additional tax at year end, for which the purchaser may be liable if the seller defaults on the payment.13 Thus, the escrow amount or the amount withheld from the purchase price may need to be held for an extended period.  

States that May Assert a Liability Against a Purchaser

Purchasers also need to consider in which states they may be subject to bulk sale laws. Many states’ bulk sale laws hold a purchaser liable for the seller’s unpaid state tax liabilities regardless of the purchaser’s connection to the state or the assets’ connection to the state.14 Instead, such states’ bulk sale laws apply whenever the seller has sufficient contacts with the state to be subject to tax. For example, the New York statute holds a purchaser liable for the tax liability of any seller that is “required to collect tax” (i.e., any seller with New York nexus).15 The statute places no limitation on the type of purchaser subject to New York’s bulk sale law.16 Thus, if a company that does business only in Oregon buys assets that are located in Oregon from a seller that has a New York sales and use tax liability, New York might assert that its bulk sale law applies to the sale. Because state statutes may apply broadly, purchasers acquiring assets from a seller with a large state tax footprint may need to consider the bulk sale reporting requirements of many states.

However, we believe that, despite the broad language of some bulk sale statutes, the Due Process Clause and the Commerce Clause of the United States Constitution prevent a state from imposing liability on a purchaser merely because the seller has nexus with that state.

Purchasers against whom bulk sale liability has been asserted should consider whether the United States Constitution prevents the application of such laws to their facts.

Sales That May Trigger the Purchaser’s Tax Liability

States define the sales to which their bulk sale laws apply differently. Bulk sale laws often apply when the amount of assets transferred by a business are substantial (hence the term “bulk sale”). For example, South Carolina’s bulk sale law applies “[i]n the case of the transfer of a majority of the assets of a business, other than cash, whether through sale, gift, devise, inheritance, liquidation, distribution, merger, consolidation, corporate reorganization, lease or otherwise . . . .”17 Similarly, a regulation of the New Mexico Taxation and Revenue Department provides several indicia of sales to which its bulk sale law applies, including the following:

1. Has a sale and purchase of a major part of the materials, supplies, equipment, merchandise or other inventory of a business enterprise occurred between a transferor and a transferee in a single or limited number of transactions?[; and]

. . . .  

3. Was a substantial part of both equipment and inventories transferred? 18

As can be seen from the quoted language above, a state’s bulk sale law may not use the term “bulk.” Some states use general terms to describe the applicable transactions. For instance, Texas’ bulk sale law applies when a person “sells the business or the stock of goods of the business. . . .”19 By contrast, the New York tax law actually uses the term “bulk” in its statute, which defines the transactions to which bulk sale liability attaches as “a sale, transfer, or assignment in bulk of any part or the whole of his business assets, otherwise than in the ordinary course of business. . . .”20

Although it may seem reasonable that bulk sale liability may arise from the sale of most of the assets of the business, a state’s bulk sale laws may apply even when an insubstantial amount of a company’s assets are sold. For example, in Matter of Prestige Pool & Patio Corp., a New York Administrative Law Judge recently determined that a bulk sale occurred when a pool installation company sold three of its vehicles to an unrelated pool company for less than $20,000.21

Because New York’s bulk sale reporting requirements were not met, the purchaser was liable for the seller’s unpaid sales tax obligations, which was an amount nearly equal to the total purchase price of the vehicles.22 Interestingly, as noted by the Administrative Law Judge in Prestige Pool, under New York law, multiple purchasers could be potentially liable for a seller’s unpaid state taxes based on New York’s definition of “bulk” sale.23

Bulk Sale Filing Requirements

States typically have mechanisms for protecting a purchaser from becoming subject to the seller’s tax liabilities. In fact, the Pennsylvania Department of Revenue’s Web site states that “[t]he Department of Revenue is responsible for enforcing the bulk sale law and ensuring a purchaser does not unknowingly become liable for all of a seller’s Pennsylvania tax liabilities.”24 Thus, states typically relieve an asset purchaser from the seller’s unpaid state tax liability when the proper reporting requirements are met. These filing requirements, which generally involve filing a bulk sale notice, are procedural in nature and are enacted to ensure that the state is aware of the pending transaction. The filing allows the state to take action to recover any unpaid taxes and notify the purchaser of potential liabilities. The following paragraphs discuss these reporting requirements.

Duty of Buyer or Seller

Although a purchaser may ultimately be liable for the seller’s unpaid state taxes, some states place the burden of filing the bulk sale notice on the seller while other states place the burden on the purchaser. If the state imposes the filing duty on a purchaser, the purchaser may be able to avoid liability by timely filing a bulk sale notice with the state and withholding an amount equal to the seller’s unpaid state taxes from the purchase price.25 If the responsibility is imposed on a seller, the purchaser can still be liable for the seller’s unpaid state tax obligations if the purchaser does not obtain a receipt from the seller showing that the seller has paid its tax obligations.26 A state’s department of revenue generally issues such receipts or other forms of verification attesting to the seller’s tax history.

Purchasers should consider the bulk sale filing requirements in all states where the seller may have a state tax payment obligation, even those states where the duty to file the notice is placed on the seller. Aside from potential tax liability, the purchaser may not be able to obtain business permits, such as a sales tax registration permit, in states where the seller has an outstanding tax liability.27 For example, in Carlton Southwest, Inc. v. Oklahoma Tax Commission, the Oklahoma Court of Appeals affirmed an Administrative Law Judge’s determination that, pursuant to Oklahoma law, the Oklahoma Tax Commission could not issue a sales tax permit to a purchaser in the bulk sale of an automotive dealership until the seller’s delinquent sales tax claims were settled.28 The purchaser in that case failed to withhold from the purchase price the amount necessary to pay the seller’s unpaid tax liability. The Oklahoma Tax Commission estimated the seller’s unpaid sales tax liability based on the seller’s previously filed sales tax reports and the purchaser was obligated to pay the outstanding tax liability, including interest and penalty, before it could obtain a sales tax permit. Thus, by not filing the bulk sale notice, the purchaser wound up paying the full purchase price to the seller and then an additional amount to the Oklahoma Tax Commission.

Variations in Bulk Sale Filing Deadlines and States’ Response Times

Regardless of whether the purchaser or seller is required to notify the state of the pending asset sale, the timing and deadlines of bulk sale notice requirements vary significantly from state to state. Some states require the seller or purchaser to file the bulk sale notice prior to the closing date, while other states allow the notice to be filed after the closing date. For example, Connecticut recommends that the purchaser file a bulk sale notice at least ninety days before the closing, while New Jersey and New York require the purchaser to file a bulk sale notice at least ten days before the date of sale.29 If the state allows the notice to be filed after the closing date, the window for filing may be short (e.g., ten days after the closing date in Hawaii).30

Once the seller or purchaser files a bulk sale notice with a state, the state is generally required to notify the filing party of the seller’s unpaid tax obligations. Many states have a statutorily prescribed response time, which can be as little as ten days or as long as six months.31 However, some states do not have a statutorily imposed response time constraint.32

If notified by a state of potential unpaid liabilities, a purchaser must escrow or withhold such notified amount from the purchase price. If not notified by a state, a purchaser may face some difficult choices. The purchaser may decide to place an estimated amount in escrow to cover the seller’s potential state tax obligations or withhold an estimated amount from the purchase price. However, it is unlikely that the purchaser will know with certainty whether it withheld a sufficient amount until it receives a response from each state. The seller, on the other hand, may place pressure on the purchaser to return the escrow or withheld amount as soon as possible or attempt to bargain for no escrow or withholding.

Bulk Sale Notice Forms and Required Information

The amount of information required by a state varies. A state may require substantial information or may only require the identities of the seller and purchaser and the date on which the sale is to be completed. Some states supply forms that a seller or purchaser may use to file a bulk sale notice. New York requires the filing of a one page form.33 New Jersey requires a purchaser to: (1) file form C-9600; (2) set forth the price, terms, and conditions of sale; and (3) state whether the seller has represented or informed the purchaser that it owes any sales tax, whether the purchaser has knowledge that such taxes are owing, and whether any such taxes are, in fact, owing.34 Connecticut and Idaho require the purchaser to attach a copy of the asset purchase agreement to the bulk sale notice.35

Additional Considerations

Bulk sale laws may present other issues for purchasers. For instance, a purchaser may be subject to an extended statute of limitations period, may be barred from challenging a state tax assessment or may be held liable for the unpaid state tax liability of the seller’s predecessor.

Statute of Limitations

State statutes of limitations may be extended or otherwise changed when a purchaser buys assets. Thus, a state may be permitted to assert a seller’s unpaid state tax liability against a purchaser even after the seller’s statute of limitations period has expired.36 The statute of limitations may be based on the date of sale, as in Maine, where the state may assess sales and use tax against the purchaser at any time within six years from the date of the asset sale.37 By contrast, in North Carolina the statute of limitations for assessments expires one year after the statute of limitations would otherwise have run had the sale not occurred.38

Notably, the statute of limitations changes may influence a purchaser’s accounting following a sale. Public companies often take into account statutes of limitations periods for reserve and reporting purposes, such as under FIN 48.39 Thus, establishing the appropriate reserves may require an analysis of the statute of limitations changes resulting from a bulk sale.

Challenging an Assessment

In some cases a purchaser may be precluded from challenging a state tax assessment. In Pennsylvania Department of Revenue v. Qwest Transmission, Inc., the Commonwealth Court of Pennsylvania held that the purchaser in an asset sale was not allowed to contest a Pennsylvania corporate income and franchise tax assessment for the seller’s unpaid taxes because the purchaser did not contest the amount within the seller’s statutory resettlement period.40 After a bulk sale, the Pennsylvania Department of Revenue issued a settlement (i.e., an assessment) for the seller’s unpaid liabilities for a period prior to the sale.41 The seller’s statutory resettlement period was ninety days from the date that the Department assessed the liability against the seller. During that ninety days, neither the seller nor the buyer contested the assessed tax.42 The court concluded that the purchaser was liable for the $2,535,173.50 tax assessment even though the purchaser did not know of the seller’s unpaid tax liability during the ninety day resettlement period.43 Had the purchaser secured a bulk sale clearance certificate prior to the sale, it would have had an opportunity to discover the unpaid tax liability and contest the assessment within the statutory resettlement period.44 The court determined that the purchaser’s “lack of diligence” deprived it of the opportunity to raise the issue after the expiration of the resettlement period.45

Unpaid Tax Liability of the Seller’s Predecessor

The purchaser in a bulk sale may also be liable for the unpaid tax liability of the seller’s predecessor.46 Upholding a New York State Administrative Law Judge determination, the New York State Tax Appeals Tribunal held that a company that purchased a convenience store without filing a bulk sale notice was liable for the sales tax obligation of the seller’s predecessor.47 Brooklyn Subs, Inc. (“Brooklyn”) purchased a convenience store from Buy Rite Grocery Corp. (“Buy Rite”) and was informed by the New York State Division of Taxation that Buy Rite had an outstanding sales tax liability.48 Brooklyn did not withhold a sufficient amount from the price to cover Buy Rite’s unpaid sales tax liability.49 Brooklyn subsequently sold the business to 751 Bergen Dely, Inc., which also did not file a bulk sale notice with the state.50 The Tax Appeals Tribunal held 751 Bergen Dely, Inc. liable for the unpaid sales tax obligation of Buy Rite, the seller’s predecessor. 51


When entering into an asset deal, a purchaser should remember the Latin phrase caveat emptor — “let the buyer beware.” A purchaser of a business’ assets may be liable in multiple states for the unpaid state tax liabilities of the seller. State laws typically relieve purchasers of such liability when proper, timely reporting occurs. With proper planning and due diligence, the purchaser in an asset sale can successfully reduce the state tax uncertainty resulting from such transactions.