What is a Bulk Sales Transfer and why should I be concerned?
Under Pennsylvania tax law, a “Bulk Sales Transfer” occurs when 51 % or more of any goods, wares, merchandise, fixtures, machinery, equipment, buildings or real estate of a business are sold. When a Bulk Sale Transfer occurs, the provisions of the Pennsylvania Bulk Sales law become applicable.
The Pennsylvania Bulk Sales law applies to (i) all taxpayers subject to sales and use tax; (ii) all taxpayers subject to employer withholding tax; and (iii) all corporations, joint-stock associations, limited partnerships or companies (including limited liability companies, partnerships and sole proprietorships) subject to any of the taxes administered and enforced by the Pennsylvania Department of Revenue. The purpose of these provisions is to insure that all outstanding tax obligations of a seller completing a Bulk Sale Transfer of a business will be paid.
In the current economy we can expect the Commonwealth to be very aggressive in pursuing any and all options for recovering unpaid taxes. So when purchasing assets that may be subject to the Bulk Sales law, more than ever, this is a time for the buyer to beware! Failure to comply with the Bulk Sales law may result in the buyer assuming joint liability for all of the seller’s tax liabilities that have not been satisfied as of the date of sale.
In order to comply with the Bulk Sales law, notice of the proposed sale must be provided to both the Pennsylvania Department of Revenue and the Pennsylvania Department of Labor and Industry at least ten days prior to closing. In addition, the seller must apply for, and receive tax clearance certificates from these departments which confirm that all taxes arising out of the seller’s operation of the business have been paid. In order to avoid liability, the buyer must take an active role in making sure that these requirements are complied with.
What further complicates this procedure is that the time frame to acquire the tax clearance certificates from Harrisburg is open ended. Frequently, more than a year or more can pass between the application to the Commonwealth agencies and receipt of the clearance certificates. After a business sale has occurred, the seller may no longer be available, or the sale proceeds may have been distributed to the owners of the business. For this reason, the sale agreement between a seller and buyer covering the transfer of assets subject to the Bulk Sale law should provide for an indemnity agreement whereby the seller holds the buyer harmless from the seller’s tax obligations, whether these obligations have been assessed as of the closing date or not. Such an indemnity agreement should be obtained from both the seller and its owners, and if possible, should be secured with funds paid by seller at closing into escrow to cover possible unpaid taxes. The escrow funds will then not be released until the tax clearance certificates are received from Harrisburg.
In an era when we are so often dealing with entities that have but a single asset, close consideration of the provisions of the Bulk Sale law should be an absolute requirement to protect the buyer of these assets from tax liability. If you have any questions concerning the sale or purchase of assets, or the applicability of the Pennsylvania bulk sales law, please contact one of the Business Department attorneys at Hamburg, Rubin, Mullin, Maxwell and Lupin at 215.661.0400.