Sahn Ward Braff Koblenz Coschignano, PLLC May 2019 E-Newsletter
Corporate Law Practice Update

Often-Overlooked Pitfall When Acquiring an Existing Business
By Kyle M. Lawrence

When you purchase an existing business by acquiring its assets, no amount of due diligence can guarantee that every land mine is discovered. After the closing, purchasers often discover outstanding liabilities, and can find themselves meandering through the murky waters of the seller’s business. While, generally speaking, the seller’s liabilities don’t automatically transfer to the purchaser, a simple misstep can result in the seller’s unpaid New York State sales taxes becoming a significant problem after you have already purchased the business.

Most states have laws related to successor liability on business acquisitions, allowing the states to collect a seller’s outstanding tax liability directly from the purchaser. In certain instances, the purchaser may be held liable for the amount of the seller’s unpaid sales taxes, up to the higher of the purchase price or fair market value of the assets being acquired. In other words, the purchaser will have effectively purchased the assets twice! While the purchase agreement will (hopefully) contain indemnification provisions to protect the purchaser, in the state’s eyes, the purchaser is liable for that debt and the purchaser would then be forced to sue the seller to recoup the money it spent.

To protect purchasers, many states, including New York, have implemented a simple notification procedure whereby a purchaser notifies the state’s taxing authority prior to the closing of the transaction. In New York, there is a mechanism in place containing specific requirements prior to entering a “bulk sale” – a sale of any part of the business assets outside of the ordinary course of business. At least 10 days before the closing, a purchaser must notify the Department of Taxation and Finance by filing Form AU-196.10, Notification of Sale, Transfer or Assignment in Bulk. Within 10 days of receipt of the form, the Department must respond to the purchaser regarding any unpaid sales taxes by the seller. If no taxes are owed, a release is issued and the purchaser can rest easy that it won’t be liable for any of the seller’s sales taxes. Should there be an outstanding tax liability, the Department will seek payment of taxes directly from the seller. Best practices suggest that the purchaser not pay for the assets until the liability is satisfied.

The bottom line here is that most purchasers often forego this simple filing with the state Department of Taxation and Finance and rely on the seller’s “word” that everything has been paid. Of course, everyone is friends until it’s time to write a check and no purchaser should find themselves in the position of having to pay the seller’s liabilities after having just paid them for the business.

If you have any questions about company sales or any other questions pertaining to the administration of your business, please feel free to contact Kyle M. Lawrence at or (516) 228-1300.

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