By Kathleen G. Moriarty, Peters & Moriarty,
Attorneys and Counselors of Law
Legal Matters is a regular column intended to address general legal concerns. Since every client walks in the door with a different set of circumstances, you should not rely on this column to provide specific legal advice. If you are in need of specific legal advice, please consult with an attorney; he or she will provide advice that is unique and tailored to your legal needs.
The greatest difference between buying a home and buying a business is that the purchase assets need to be itemized and reported to the New York State Tax Department. The reporting serves two purposes: 1) it documents the assets that the buyer will be required to pay sales tax on, and 2) it ensures the state’s ability to collect outstanding sales tax owed by the business (the seller). If the buyer fails to notify the Tax Department, she may be held liable for the business’s unpaid sales tax.
Thus, at least 10 days prior to closing, the buyer is required to file a Notification of Sale, Transfer or Assignment in Bulk (“Notification”), categorizing the assets as follows:
personal property, including fixtures;
inventory for resale;
equipment, including machinery, tools, and supplies;
The buyer will be required to pay sales tax on any personal property, motor vehicles and certain types of equipment he purchases. The buyer will not pay sales tax on inventory he purchases to resell, because these items will be taxed when sold to the consumer. Goodwill and real property are also exempt from sales tax, but real property is subject to other transfer and ownership tax consequences.
The tax consequences of such a sale can be considerable, and the liabilities are different from each party’s perspective. Parties are strongly recommended to hire separate accountants to negotiate the best breakdown.
Further, the buyer will be held personally liable for any unpaid sales tax due from the business if she fails to meet the state’s filing requirements. The buyer’s liability is limited, however, to the purchase price or the fair market value of the business assets sold.
Once the Notification is filed, the state must respond within five days of its receipt. If no taxes are owed, the state will send the buyer a release, and parties can proceed with closing. If the state fails to send the release, the buyer cannot be held liable for the seller’s unpaid sales taxes.
If taxes are owed, the state will send a Notice of Claim to the buyer; the buyer is then prohibited from releasing the sales proceeds to the seller until the state notifies the buyer of the amount owed. If the state fails to notify the buyer of the amount owed within 90 days, the buyer is released from liability.
Reader Question regarding FIRPTA withholding:
Can one reduce the 10 percent liability by proving the liability is less than 10 percent?
Dear Reader: Yes. By law, the amount of tax required to be withheld under the provisions of FIRPTA cannot exceed the maximum tax liability of the seller, and the maximum is often significantly less than the 10 percent required withholding. Under these circumstances, a seller can apply for a withholding certificate, which is a formal request that the IRS agree to reduce the withholding amount. Since the IRS may take up to 90 days to approve a request, seller’s attorney is permitted to hold onto the 10 percent withholding until the certificate is obtained.