In a recent New York State Tax Appeals Tribunal case (Llargo of Lockport, Inc., New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 821974, August 23, 2010), the Petitioner, Llargo of Lockport, Inc., and the Division of Taxation each filed an exception to the determination of the Administrative Law Judge issued on July 9, 2009.

Issue
Whether petitioner’s use of property, including tables, chairs, bar stools, and tableware, left behind on the premises of its restaurant, as well as its conduct of business under the same restaurant name as its predecessor, with the same menu and cooking staff, constituted the transfer bulk of business assets under Tax Law § 1141(c) so that petitioner, as the transferee, became liable for sales tax determined due from the predecessor restaurant.Administrative Law Judge Decision

The Administrative Law Judge determined that there was a bulk sale and that petitioner, as purchaser of the business, is responsible for the sales tax obligations of the seller when, as occurred here, timely notice had not been filed (see, Tax Law § 1141[c]).

The Administrative Law Judge determined that the seller received $150,000.00 for transferring her interest in the real property in which the business is located, which was worth $100,000.00, and that $50,000.00 should be attributed to the value of goodwill received by the purchaser and that petitioner’s obligation is limited to the $50,000.00 thus paid to the seller (see, 20 NYCRR 537.4[c]).

The Administrative Law Judge refers to the definition of goodwill as an intangible asset that attaches to a business due to such factors as location, reputation and managerial skill.

New York Tax Appeals Tribunal Decision

The Tribunal affirmed the determination of the Administrative Law Judge. The Tribunal found that the Administrative Law Judge correctly and completely addressed all of the issues raised by the parties.

So What?

If your company or client is involved in any purchase of assets of another business, you need to be aware that some states have "bulk sale notice" requirements (i.e., notice is required to be made to the state of such sale 15 days prior to the date of sale). Compliance with these requirements will protect your company or client. NOTE: Each state will have its own requirements.

On the flip side, several states have "bulk sale" exemptions which would exclude the sale from sales tax. Again, each state is different and may not have an exemption.

Please contact me at brian.strahle@bakertilly.com if your company or client needs assistance in determining its sales tax or bulk sale notification requirements related to any asset purchase. NOTE: This analysis needs to be done prior to the sale becoming final.