What is a bulk sale and why should employers care? Jay Alberstadt

What Is a Bulk Sale and Why Should You Care?

LEGAL BRIEF

Jay Alberstadt is a partner at MacDonald Illig and chair of the firm’s Real Estate Practice Group and Marketing Committee. He concentrates his practice in the areas of real estate, commercial and economic development, and conventional and tax exempt financing.

Even cautious purchasers of business assets (whether machinery, equipment or real estate) may not be aware of the hidden dangers of Pennsylvania’s bulk sales laws. Without requiring the government to file a lien against the assets themselves, these laws nevertheless impose personal liability on the purchaser of the assets for unpaid Pennsylvania taxes. A “bulk sale” occurs when there is a sale of 51 percent or more of the assets of 1) any taxpayer subject to Sales and Use Tax or Employer Withholding Tax, or 2) any corporation, limited partnership or

company (including limited liability companies, partnerships and sole proprietorships). Unless a purchaser in a bulk sale obtains Clearance Certificates from the Pennsylvania Department of Revenue and the Pennsylvania Department of Labor and Industry, the purchaser has perpetual personal liability for any unpaid Pennsylvania taxes. The bulk sales laws initially require that the Department of Revenue and the Department of Labor and Industry be notified 10 days prior to the closing of the bulk sale transaction. Thereafter, to obtain a Bulk Sales Clearance Certificate, the seller must file an Application for Tax Clearance Certificate (Form REV-181) with both the Department of Revenue and the Department of Labor and Industry. While the Application can, in theory, be filed prior to closing, in practicality it is typically filed post-closing, as the seller also must complete and file all tax returns and pay all taxes due to the Commonwealth up to and including the date of the sale. This results in the dilemma of the buyer needing the Clearance Certificate to be protected following the closing, but not being able to obtain it until the closing has been consummated. Complicating matters further, the Commonwealth can take a year or longer to issue a Bulk Sales Clearance Certificate. So, the reality is that the buyer must close without the immediate protection of a Clearance Certificate. How does the buyer then protect itself until the Certificate can be obtained? First, make certain that the Agreement of Sale or Asset Purchase Agreement includes representations from the seller that the seller owes no Pennsylvania taxes. Second, obtain a full indemnity from the seller against liability for any such taxes. Third, obtain a certification from the seller’s certified public accountant that the seller has filed all required tax returns, paid all required taxes and is not subject to any audit. Finally, the buyer should also consider holding back money in escrow. Since a seller will most likely distribute the funds received from the sale of the property and dissolve the selling entity, personal guaranties of the indemnity provisions by the owners of the selling entity and an escrow of a portion of the purchase price until the Clearance Certificate is obtained are recommended. Less drastic measures may be sufficient in many cases. Not every sale of business property will be a bulk sale. Some sellers will be able to demonstrate and certify to the buyer that the assets being sold do not constitute 51 percent or more of the seller’s total assets. Another common scenario is a single purpose limited liability company seller of real estate, where the LLC has no employees or sales at retail. The LLC is likely a passthrough entity that pays/owes no income taxes (a certificate to this effect can be obtained from the Department of Revenue), and is not liable for Sales and Use or Employment Withholding taxes (no retail sales; no employees). In such circumstances, a bulk sales indemnity agreement from the entity and its owners will usually suffice in lieu of the more elaborate procedures outlined above. For more information, contact Jay Alberstadt at 814/870-7750 or jalberstadt@mijb.com.