If a bulk-sale purchaser defaults and returns the business assets to the seller in lieu of foreclosure, is she released from liability for the seller's unpaid sales taxes?

Plain-English summary

Susan Jane Jankowski bought a bar and tavern business in bulk from its owner under a written agreement and an installment contract (a $25,000 purchase price paid over ten years, secured by a security agreement naming the seller as secured party). She took possession of the business assets in November 1982. After local economic conditions worsened, she could not keep up the installment payments and asked whether returning the assets to the seller, in lieu of foreclosure, would cancel the sale and release her from liability for the seller's unpaid sales and use taxes under Tax Law 1141(c) (the bulk-sale rule).

The Department held that she is not released — she remains liable under the bulk-sale rules.

• The bulk-sale rule. Under Tax Law 1141(c), when a person required to collect tax sells business assets in bulk (outside the ordinary course of business), the purchaser must notify the Tax Commission by registered mail at least ten days before taking possession or paying. A purchaser who fails to give that notice — or who is told a tax claim may exist — must withhold funds owed to the seller, and those funds are subject to a first-priority lien for the seller's taxes.
• Returning the assets did not cancel the sale. Because she used the property in the business for at least a year after acquiring it, her claim that the sale was "canceled" fails. The Department cited Matter of Maurice S. Englander, TSB-H-81(96)S.
• The return is itself a separate 'sale.' Under 20 NYCRR 526.7(a)(3), a transfer of tangible personal property in a repossession or foreclosure — however effected, including voluntary relinquishment — is itself a "sale." So handing the assets back to the seller is a new taxable transaction, not an unwinding of the original one.
• Her purchaser status is unaffected. Not complying with the security agreement, and not paying the installment notes, does not change her status as the bulk-sale purchaser.
• The liability that remains. (A) If she filed a proper and timely bulk-sale notice and withheld funds, her liability is limited to the purchase price she withheld. (B) If no notice (or a late notice) was filed, she is personally liable for the seller's taxes — whether or not she held back funds — up to the higher of the purchase price or the fair market value of the assets as of the sale date.

What this means for you

Buying a business in bulk makes you a potential tax collector for the seller's debts. Before you take possession or pay, send the Tax Commission the bulk-sale notice (by registered mail, at least ten days ahead). That notice is what caps your exposure at the purchase price you withhold.

Skipping the notice is the expensive mistake. If you don't file (or file late), you become personally liable for the seller's unpaid sales and use taxes up to the higher of the price or the assets' fair market value — even if you never held anything back.

Giving the business back doesn't undo the deal. Once you've operated the business, returning or surrendering the assets is treated as a fresh sale, not a cancellation. It won't erase liability you already incurred as the purchaser.

Common questions

Q: I bought a business in bulk, then had to hand it back when I couldn't pay. Am I off the hook for the seller's taxes?
A: No. Operating the business for a period means the original sale wasn't canceled, and the hand-back is treated as a separate sale. Your bulk-sale liability continues.

Q: How do I limit my exposure as a bulk-sale buyer?
A: File a proper, timely bulk-sale notice with the Tax Commission (registered mail, at least ten days before taking possession or paying) and withhold the funds it directs. That limits your liability to the purchase price you withheld.

Q: What happens if I never filed the bulk-sale notice?
A: You become personally liable for the seller's unpaid sales and use taxes up to the higher of the purchase price or the fair market value of the assets as of the sale date — regardless of whether you kept back any money.

Citations and references

Tax Law:

• 1141(c) — bulk-sale notice requirement and the purchaser's liability for the seller's unpaid sales/use taxes; funds subject to a first-priority lien; 90-day claim-notice window

Regulations (20 NYCRR):

• 537.2, 537.3(c), 537.4(a) — bulk-sale notice procedure; when the purchaser is relieved of the withholding obligation; personal liability for failure to withhold
• 526.7(a)(3) — a transfer of tangible personal property in a repossession or foreclosure (including voluntary relinquishment) is itself a "sale"

Prior determination cited:

• Matter of Maurice S. Englander, TSB-H-81(96)S — using the property in the business negates a claim that the sale was canceled

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_36s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(36)S
Sales Tax
August 21, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S840612A

On June 12, 1984 a Petition for Advisory Opinion was received from Susan Jane Jankowski,
69 Westmont Avenue, Elmira, New York 14901.
The issue raised is whether Petitioner, the purchaser in a bulk sale transaction, is relieved of
her liability, in accordance with Section 1141, subd.(c) of the Tax Law, for any unpaid sales or use
taxes of the seller upon returning to the seller, in lieu of foreclosure proceedings, the property
purchased in bulk under an installment sale contract.
On September 9, 1982, Petitioner and the owner of a bar and tavern business (hereinafter
"Seller") entered into a written agreement whereby Petitioner consented to purchase said business
subject to completion of payments required under an installment agreement. On November 12,
1982, after execution on that date of the bill of sale, the installment contract, and a security
agreement (naming Seller as the secured party), Petitioner took possession of the business assets.
The terms of the installment contract provide, in part, as follows: "The buyer agrees to pay
the Seller for said business and equipment the sum of $25,000.00 and interest at the rate of ten
percent per annum as follows: $5,000.00 upon the execution of this Agreement, thereafter, $1,500.00
with interest at the rate of ten percent per annum shall be paid on or before one year from the date
hereof; and an additional $1,500.00 with interest at the rate of ten percent per annum shall be paid
on or before two years from the date hereof. The Buyer shall pay the balance of the purchase price
of $17,000 by making monthly payments. . .for a period of ten years. . ., until the full purchase price
is paid." The provisions of the security agreement state that "upon default by the debtor. . ., the
obligations secured by this agreement shall immediately become due and payable in full. . . and the
Secured Party shall have all the rights. . . with respect to repossession, retention and sale of the
collateral and disposition of the proceeds as are accorded by the applicable sections of the Uniform
Commercial Code respecting "Default". . . The Debtor shall remain liable for any deficiency
resulting from a sale of the collateral and shall pay any such deficiency forthwith on demand."
Petitioner states that its business has suffered reverses because of a decline in local economic
conditions, and it has been unable to make the installment payments due the seller since November
of 1983. Petitioner inquires whether the return of the business assets to Seller under the conditions
of the security agreement would constitute a cancellation of the sale and would therefore effectuate
Petitioner's release from its liability for Seller's unpaid sales and use taxes.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-85(36)S
Sales Tax
August 21, 1985

Section 1141(c) of the Tax Law provides, in relevant part, that "Wherever a person required
to collect tax shall make 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, the purchaser, transferee or
assignee shall at least ten days before taking possession of the subject of said sale. . .or paying
therefor, notifying the tax commission by registered mail of the proposed sale and of the price, terms
and conditions thereof. . . .
Whenever the purchaser. . .shall fail to give notice to the tax commission as required by the
preceding paragraph or whenever the tax commission shall inform the purchaser. . .that a possible
claim for such tax or taxes exists, any sums of money, property or chooses in action, or other
consideration, which the purchaser, transferee or assignee is required to transfer over to the seller. . .
shall be subject to a first priority right and lien for any such taxes theretofore or thereafter determined
to be due from the seller. . .to the state, and the purchaser, transferee or assignee is forbidden to
transfer to the seller. . .any such sums of money, property or chooses in action to the extent of the
amount of the state's claim. Within ninety days of receipt of the notice of the sale. . .from purchaser.
. .the tax commission shall give notice to the purchaser. . .and to the seller. . .of the total amount of
any tax or taxes which the state claims to be due from the seller. . .to the state, and whenever the tax
commission shall fail to give such notice to the purchaser. . .and the seller. . .within ninety days from
receipt of notice of the sale, transfer, or assignment, such failure will release the purchaser. . .from
any further obligation to withhold any sums of money, property or chooses in action, or other
consideration which the purchaser. . .is required to transfer over to the seller. . . .
Applicable sections of the New York State Sales and Use tax Regulations provide as follows:
"The purchaser, transferee or assignee is relieved of his obligation to withhold such funds
and is relieved from liability for taxes due from the seller (except the sales and use taxes due on the
sale of tangible personal property between the seller and purchaser) if notice to the Tax Commission
has been given pursuant to section 537.2 of this Part; and. . .the purchaser, transferee or assignee has
received from the Tax Commission a notice that the funds being withheld may be released; or the
purchaser, transferee or assignee has received, from the seller, transferee or assignor, a bulk sales tax
certificate issued by the Tax Commission to such seller, transferee or assignor stating that all taxes
due up to the date of sale have been paid". . .20 NYCRR 537.3(c)(3)(4). "Failure by the purchaser,
transferee or assignee to withhold funds from the seller, transferee or assignor makes the purchaser,
transferee or assignee personally liable for the payment to the State of any and all sales and use taxes,
including penalties or interest theretofore or thereafter determined to be due the State from the seller,
transferee or assignor. . . ." (20 NYCRR 537.4(a)).
Within three months after November 12, 1982, the Tax Commission, in compliance with the
time limits set by the Statute, served Petitioner first a "Notice of Claim to Purchaser" and, secondly,
notice of taxes determined due from Seller and representing Petitioner's liability, as purchaser, in
accordance with Section 1141(c) of the Tax Law.

-3­
TSB-A-85(36)S
Sales Tax
August 21, 1985

Documentation supplied by Petitioner affirms that the agreement between Petitioner
and Seller to purchase the latter's business was consummated November 12, 1982, and that
there was a transfer of business assets by Seller to Petitioner on that date. The subsequent
use of the property by Petitioner in the operation of the business for at least one year from
the date of acquisition negates its contention that the sale was canceled. Matter of Maurice
S. Englander, Decision of the State Tax Commission, May 13, 1981, TSB-H-81(96)S.
Furthermore, the return of the fixtures and equipment to Seller is held a separate
transaction under the provision of Regulations Section 526.7(a)(3) which provides:
"The term sale also includes the transfer of tangible personal property in a
repossession or foreclosure action. Such transfer may be effected in any manner, including,
but not limited to voluntary relinquishment, assignment or seizure by the mortgagee." (20
NYCRR 526.7(a)(3))
Accordingly, Petitioner's non-compliance with any conditions of the security agreement does
not affect her status as the purchaser in a bulk sales transaction, nor does failure to pay any notes due
under the installment contract and the resulting repossession of property by the Seller diminish
Petitioner's obligation for payment of sales and use taxes owed by the Seller to the extent stated in
either paragraph (A) or (B) below.
(A) Where purchaser has filed a proper and timely Notification of Sale, Transfer or
Assignment in Bulk and has retained funds as required by the Tax Commission, the purchaser's
liability is limited to the purchase price, which she has withheld from the Seller.
(B) Where a notice of bulk sale is not filed or is filed late, the purchaser becomes personally
liable for taxes due from Seller, irrespective of whether or not she has kept back funds from the
Seller, up to an amount equal to the higher of the purchase price or the fair market value of the
assets, determined as of the date of sale.

DATED: August 1, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.