Explore the legal implications of buyer liability for unpaid sales tax in restaurant asset acquisitions. Understand the New York state law and court decisions in Shakeen LLC v. Courtelyou Wine LLC. Read our M&A legal blog for expert insights.
June 25, 2020
Introduction:
In the context of a merger or acquisition (M&A) involving the purchase of assets, a notable tax risk is the potential responsibility of the buyer for any outstanding sales taxes owed by the seller.
The Scenario:
In this case, a buyer acquired the assets of a restaurant. Prior to the transaction, the seller assured the buyer, through the asset purchase agreement, that there were no unpaid sales taxes owed to the state of New York.
The Legal Dispute:
However, it later emerged that the seller had indeed owed unpaid sales taxes. In New York, there exists a law that mandates the buyer to inform the state at least 10 days before the acquisition’s closure. Failing to do so renders the buyer personally accountable for the unpaid sales taxes of the seller.
In this instance, the buyer neglected to provide the required notice to New York. Consequently, New York authorities collected the outstanding sales tax debt from the buyer. Subsequently, the buyer took legal action against the seller in a New York state court, seeking reimbursement based on the seller’s breach of their representation and warranty in the asset purchase agreement.
The seller acknowledged their failure to pay the sales tax but sought to dismiss the claim by asserting that the buyer’s personal liability arose from the buyer’s failure to give the 10-day advance notice to New York.
Court’s Decision:
The court ruled in favor of the seller and dismissed the buyer’s claim. The court’s reasoning was that the buyer had an unequivocal obligation to inform the Tax Commission before the impending acquisition. The buyer’s failure to fulfill this obligation, irrespective of any good faith intentions, did not absolve the buyer from the tax responsibilities. Although the seller did breach the contract in a technical sense, no compensatory damages could be awarded because the primary harm to the buyer resulted from the buyer’s failure to notify the Tax Commission.
Comment:
This outcome might appear unjust. Despite the repeal of New York’s bulk sale law under the Uniform Commercial Code that contained this notice provision, the risk of sales tax liability still applies to asset buyers in New York businesses, because the notice provision survived in Section 1141(c) of Article 28 of the New York State Sales and Use Tax Law.
Case Reference:
This case is referred to as Shakeen LLC v. Courtelyou Wine LLC, Docket No. 521415/2019, Supreme Court, Kings County, (April 27, 2020). https://scholar.google.com/scholar_case?case=13162546052815355373&q=taxes+%22asset+purchase+agreement%22&hl=en&as_sdt=400006&as_ylo=2017
By John McCauley: I help manage tax risks associated with buying and selling businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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