Protection in a Bulk Sale

Tax Professionals' Resource
March 4, 2013 — 1,505 views  
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Bulk sales are also known as bulk transfers and refer to a situation where a business or any other entity sells a part or most of its assets to a buyer. This term usually refers to restaurants, retailers and other businesses that have inventories.

To protect the buyer from any claims by the sellers’ creditors, an affidavit should be made. These affidavits are required to be filled with a court office or some government department. It is imperative for the registration process to be completed by the buyer so that creditors do not declare the sale invalid.

Protecting Your Client from Seller’s Liabilities

In order to ensure you client-buyer is protected, you should make sure the seller along with his/her accountant prepares and delivers to you an asset transfer tax declaration. This declaration will help the State determine the tax on the profits from the asset transfer.

The buyer should create a notification of sale and assignment in bulk, which will be sent to the division of taxation with a copy of the contract that is fully executed. This should be done a minimum of 10 days before closing.

Within 10 days after the documents are received, the Division of Taxation notifies the buyer of any potential claims for state taxes. The amount that needs to be withheld from the seller’s proceeds will be specified and escrowed on the closing day by the attorney of the buyer.

Any returns that are not filed, underpayments made to the State and pending or fixed audit assessments could be included in this amount. In case no taxes are owed, a Letter of Clearance will be issued to the Division of Taxation.

Other Ways to Protect Your Client from Bulk Sales Liability  

The easiest way for a buyer to protect himself is, to hold some part of your purchase in escrow for a period of time. The amount to hold in escrow can only be fixed once the seller discloses details about the obligations and outstanding debts. A buyer that is sensible will generally want the seller to represent complete and accurate disclosures.

The buyer should ensure the seller covers any claims that are made in the future from the creditors. However, indemnifications only make sense if the seller possesses certain assets that will stay in existence after the sale of the assets.

The buyer should be careful because even if bulk transfer laws are complied with, other debts may be put in the buyer’s responsibility. For instance, in case there are any sales taxes that are unpaid or any obligations that are withheld in terms of tax. The only strategy that buyer can use to protect himself in such scenarios is to withhold a signification amount of the purchase in order to pay off the taxes.

Also, remember that complying with bulk transfer does not shield the buyer from any tax liabilities that are owed. Only a certification from a Tax Commissioner can safeguard the buyer from suck bulk sales liabilities.

Tax Professionals' Resource