When you purchase a New York business, you will need to pay sales tax on the value of the personal property included in the sale. The sales tax rate depends on the county in which the business is located. In the counties comprising New York City, the sales tax rate is 8.875%.
Your purchase agreement will typically allocate the purchase price of the business among various items, for example, Good Will, a Covenant Not to Compete, a Lease, Inventory, Equipment and Motor Vehicles. Sales tax will be due on the value allocated to the personal property; in this example, the equipment and motor vehicles.
To comply with the New York State sales tax law, you must file form AU-196, Notification of Sale, Transfer or Assignment in Bulk, at least ten days prior to the closing of the transaction. In the form, you allocate the purchase price among the various items as set forth in your contract of sale. Based on this allocation, the Tax Department will send the purchaser an invoice for the sales tax. Additionally, the Tax Department will perform an audit to determine if the seller has any unpaid sales tax liability.
If your closing takes place prior to the State’s determination of the seller’s sales tax liability, the tax law provides that the State can look to the purchaser for payment of any sales tax which may be due from the seller. Most purchase agreements therefore will provide for a portion of the purchase price to be held in escrow by the seller’s attorney until a final determination by the Department of Taxation of the seller’s sales tax liability, if any. Any sales tax liability of the seller will then be paid from this escrow
The allocation of the purchase price in an agreement to purchase a business will have other tax consequences in addition to determining the sales tax so it’s advisable to consult with your attorney and accountant when making the allocation in your contract.