BILL ANALYSIS Ó
SB 12
Page 1
Date of Hearing: July 2, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
SB 12 (Corbett) - As Amended: June 25, 2012
Majority vote.
SENATE VOTE : 34-0
SUBJECT : Bulk sales.
SUMMARY : Repeals Division 6 of the California Commercial Code
and re-enacts selected provisions of the former law that, as
modified, will apply only to transactions by certain
distributors licensed under alcohol and tobacco control laws.
Specifically, the tax-related provisions of this bill :
1)Require a buyer in a bulk sale to provide advanced notice of
the sale. Specifically, the buyer must satisfy all of the
following requirements, at least 12 business days before the
date of the sale:
a) Record notice of the sale in the office of the county
recorder in the county or counties in which the tangible
assets are located and, if different, in the county in
which the seller is located.
b) Publish the notice at least once in a newspaper of
general circulation, as provided.
c) Deliver or send the notice by registered or certified
mail to the county tax collector in the county or counties
in which the tangible assets are located.
2)Provide that, if notice is delivered to the county tax
collector during the period from January 1 to May 7,
inclusive, then it must be accompanied by a completed business
property statement with respect to property involved in the
bulk sales pursuant to Revenue and Taxation Code (R&TC)
Section 441.
3)Define "bulk sale" as a sale not in the ordinary course of the
seller's business of more than one-half of the seller's
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inventory and equipment purchased from a licensee, as measured
by value on the date of the bulk-sale agreement.
4)Define " licensee" as any of the following:
a) A person licensed as a distributor under the Alcoholic
Beverage Control Act ÝBusiness and Professions Code (B&PC)
Division 9 (commencing with Section 23000) (ABC Act)];
b) A wholesaler, as defined in B&PC Section 23021, licensed
under the ABC Act; or,
c) A person licensed as a wholesaler or distributor of
cigarettes and tobacco products pursuant to B&PC Chapter 3
(commencing with Section 22975) of Division 8.6.
EXISTING LAW:
1)Applies to bulk sales transactions, except as otherwise
provided, if (a) the seller's principal business is the sale
of inventory from stock, including those who manufacture what
they sell, or that of a restaurant owner; and (b) on the date
of the bulk sale agreement, the seller is located in this
state, or if not, the seller's executive office is in this
state. ÝCommercial Code (CC) Division 6 (also known as Bulk
Sales Act)].
2)Defines a bulk sale as one of the following:
a) In the case of a sale by auction or a sale or series of
sales conducted by a liquidator on the seller's behalf, a
sale or series of sales not in the ordinary court of the
seller's business of more than half of the seller's
inventory and equipment, as measured by a value on the date
of the bulk sale agreement.
b) In all other cases, a sale not in the ordinary course of
the seller's business of more than one-half of the seller's
inventory and equipment, as measured by value on the date
of the bulk sale agreement.
3)Exempts 16 categories of sales, including any sale of assets
that has a value of less than $10,000 or over $5,000,000 as of
the date of the bulk sale agreement. ÝCC Section 6103(c).]
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4)Requires a buyer to an applicable bulk sale transaction to
provide a notice of the bulk sale that specifies, among other
things: (a) the name and business address of both the seller
and the buyer; (b) the location and general description of the
assets; (c) the place and the anticipated date of the bulk
sale; and (d) whether or not the bulk sale is subject to
provisions relating to sales of $2 million or less, as
specified. ÝCC Section 6105(a).]
5)Requires a buyer in a bulk sale to record and publish advanced
notice of the sale. In addition, at least 12 business days
prior to the sale, the buyer must (a) record notice of the
sale in the county recorder's office; (b) publish a notice of
the sale at least once in a newspaper of general circulation;
and (c) inform the county tax collector of the sale. ÝCC
Section 6105(b)].
6)Requires a successor business acquiring either a substantial
portion of another business's assets or the entire business to
withhold a sufficient part of the purchase price or to set
aside to cover any of the seller's unpaid withholding
obligations due to the Franchise Tax board (FTB). (R&TC
Section 18669, Section 18662, Sections 18670-18677).
7)Excludes wage withholding from a business seller's withholding
obligations.
8)Authorizes the FTB, upon request of the successor, to issue a
certificate indicating any withholding and associated
penalties and interest established on the FTB's records as
owed by the seller.
9)Provides that a successor is liable for any withholding and
associated penalties and interest established on the FTB's
records if the successor fails to request the certificate.
The amount of liability may not exceed the fair market value
of the acquired assets or business.
10)Relieves a successor from liability for any other income tax
debts owed by the seller.
11)Requires a purchaser of a business or stock of goods to
withhold from the sales price sufficient funds to cover any
amount of taxes due by the seller, unless the seller produces
a tax clearance certificate from the Board of Equalization
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(BOE) stating that no amount is due. R&TC Section 6811).
FISCAL EFFECT : The FTB staff estimates that this bill will
result in an annual revenue loss of $30,000 in fiscal year (FY)
2012-13, $150,000 in FY 2013-14, and $150,000 in FY 2014-15.
COMMENTS :
1)Author's Statement . The author states that, "This bill
repeals provisions in the UCC Article 6 ÝBulk Sales], and
eliminates references to Article 6 in statute. The bill
conforms this practice to 47 other states in the union, and
its repeal would be in line with recommendations made by the
Uniform Law Commission.
"Article 6 imposes a series of harsh punishments for a failure
to comply. A buyer that fails to comply with the notification
provisions is liable to creditors of the seller for damages
equal to the amount that the creditors would have been
entitled to receive had there been compliance; unless the
buyer can prove that it actually made good faith and
commercially reasonable efforts to comply. To comply with
Article 6, a buyer in bulk from a California merchant must
make as many as 40 determinations in order to accurately
assess whether Article 6 applies.
"Today, Article 9 of the UCC allows a creditor to secure
creditor's claims with the merchandise and its proceeds, or
identifiable cash process in the case of junior inventory
secured parties, via an Article 9 security interest. Bulk
sales account only 1% of all transactions. Further, it has
become standard business practice for many buyers and sellers
in California knowingly not to comply with the California Bulk
Sales Law. This practice has developed because parties view
compliance with the California Bulk Sales Law as burdensome.
To address the risks, parties often negotiate specially
designed representations and warranties, indemnification
provisions, holdbacks, and set-offs.
"California remains only one of three states, in addition to
the District of Columbia, that retains this arcane law from
the frontier days. Forty-seven other states, including
neighboring states, New York, Illinois, and Texas, have
repealed this relic.
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"Further, existing law provides strong protection for the
rights of creditors to pursue the debt through the Uniform
Fraudulent Transfer Act. This act creates a right of action
for any creditor against any debtor and any other person who
has received property from the debtor in a fraudulent
transfer. The law identifies a fraudulent transfer as an
occurrence when a debtor intends to hinder, delay, or defraud
a creditor, or transfers property under certain conditions to
another person without receiving reasonably equivalent value
in return.
"UFTA distinguishes between present and future creditors, and
specifies the kinds of transfers that are fraudulent to each
of the two categories of creditors. Both present and future
creditors may recover property when there is a transfer with
intent to defraud. Both may recover when a transfer is made
without receiving reasonably equivalent value when the result
is to make the debtor's assets unreasonably small in relation
to the business or transaction in which the debtor is engaged
or about to be engaged. Also, present and future creditors can
both recover when a debtor transfers property without
receiving reasonably equivalent value when intending to incur
debts beyond the ability to pay.
"Present creditors, however, can recover property when it is
transferred by a debtor to another person without receiving
reasonably equivalent value if the debtor is insolvent or
becomes insolvent as a result of the transfer. A transfer to
an "insider" without receiving reasonably equivalent value
when the debtor is insolvent, is also fraudulent to present
creditors. The term "insider" is defined, and is someone with
a special relationship to the debtor. Examples are relatives
or business partners (when the debtor is a partner). To be
liable, an "insider" must have reasonable cause to believe
that the debtor is insolvent.
"The fundamental relief for a creditor when there is a
fraudulent transfer is recovery of the property from the
person to whom it has been transferred. UFTA allows "avoidance
of the transfer or obligation to the extent necessary to
satisfy the creditor's claim. . . ." Whatever is necessary to
obtain the property is provided for, including attachment,
injunctive relief, appointment of a receiver, or "any other
relief the circumstances may require." If the creditor has
reduced the claim to a judgment, the court may levy execution
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against the recovered assets. This means that the property can
be sold to satisfy the amount of the judgment."
2)Arguments in Support . The sponsor of this bill states that
Article 6 of the CC, relating to bulk sales, as originally
enacted and subsequently revised in California, is obsolete.
The sponsor asserts that the Bulk Sales Law has been
superseded by other laws that offer better protection of
creditors and should be repealed in order to bring the
California Commercial Code into conformity with the UCC
throughout the country.
3)Arguments in Opposition . The opponents of this bill state
that, "in the statutory process prescribed in the existing
bulk sales law, tax agencies are afforded the opportunity to
be paid from the gross sales proceeds available in the
transaction, with priority granted to federal, state and local
tax agencies ahead of all other creditors." They contend that
millions of dollars are collected for state agencies from bulk
sale transactions. The opponents also argue that, while
proponents suggested that creditors could utilize Division 9
of the California Commercial Code to obtain secured creditor
status, creditor's "post-sale recourse would generally be
limited to actions brought in our already over-burdened courts
where civil matters are expected to take increasingly longer
to adjudicate." Finally, the opponents point out that
existing regulations promulgated by the FTB, BOE, and the
Employment Development Department (EDD) provide for successor
liability for business obligations and it is unclear how those
requirements would be met in the absence of a bulk sales law.
4)What Does this Bill Do ? The latest version of SB 12 repeals
the Bulk Sales Act entirely but restores selected sections of
the Bulk Sales Law that would apply only to distributors and
wholesalers who are licensed under the Alcohol and Beverage
Control Act or the Cigarette and Tobacco Products Licensing
Act. SB 12 preserves significant notice and escrow provisions
but applies to a much narrower set of bulk sales transactions.
As noted in the Judiciary Committee's analysis of this bill,
somewhat unique tax liabilities of alcohol and tobacco
suppliers and retailers, as well as concerns about tax
collection, arguably justify a more cautious approach towards
the repeal of the Bulk Sales Law.
5)Would This Bill Affect the Collection of Other State and Local
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Taxes ? In the case of bulk sales, existing law requires that
federal, state and local tax debts be paid first, before all
other claims. According to the California Escrow Association,
just in the last 18 months, escrow companies involved in
various bulk sales transactions in the state collected and
distributed over $580,000 to counties, $3,357,383 to the State
BOE, $542,073 to the FTB, and $113,004 to the EDD, for a total
of $4.6 million.
a) The FTB Tax Collection Program. Currently, the FTB uses
recorded notices of bulk sales as a tool in identifying a
potential source of funds to collect delinquent tax debts
owed by the seller involved in a bulk sale. Generally, a
buyer is required to withhold a sufficient part of the
purchase price to cover any of the seller's delinquent tax
obligations (for example, California-source payments to
nonresidents, credits or amounts for which the FTB issued
an 'order to withhold,' etc.). The buyer may request a
certificate from the FTB to determine if any withholding is
due. Some buyers fail to request a certificate from the
FTB even though they record notice of a bulk sale in the
county recorder's office. In those cases, the FTB would
have no knowledge of the sale if the notice is not
recorded. Arguably, the buyers would also have less of an
incentive to contact FTB for a certificate if they are not
required to provide public notice of the prospective sale.
While the buyer who has failed to request a certificate is
liable for any withholding as well as associated penalties
and interest, not to exceed the fair market value of the
assets or business acquired, it would take extra time and
potentially more resources to identify and collect the owed
amounts. Consequently, FTB's tax collection programs may
be somewhat negatively affected if the existing notice
requirement is repealed.
b) The State BOE Tax Collection Program. The BOE has
largely relied on R&TC Sections 6811 through 6815
(so-called 'successor liability statutes') in collecting
delinquent taxes of a seller who sells his/her business or
stock goods. The purpose of those statutes is to prevent
the retailer who owes and has failed to pay the sales tax
to the state from selling his/her business and departing
with the sales proceeds. ÝSchnyder v. BOE (2002) 101
Cal.App. 4th 538, 541]. Specifically, those provisions
require the purchaser to withhold from the sales price
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sufficient funds to cover any amount of taxes due, unless
the seller produces a certificate of tax payment from the
BOE. In those cases where the seller has failed to produce
a Certificate of Tax Payment, or the purchaser has failed
to withhold the amount of the liability, the purchaser
becomes personally liable for the taxes due, to the extent
of the purchase price.
The bulk sales statutes do not take priority over the
successor liability statutes nor were they intended to
substitute for other remedies available to creditors or
furnish an adequate substitute for such remedies (Id., at
p. 549). Furthermore, in practice, BOE staff rarely, if at
all, relies on recorded notices of bulk sales. Thus, it
appears that SB 12 would not have a direct impact on the
BOE's statutory ability to collect delinquent tax liability
of sellers in bulk sales transactions. However, a
certificate of tax payment (or tax clearance) is normally
handled through escrow and, in most cases, is a condition
of the escrow. Thus, to the extent that fewer sales are
handled through escrow companies, it is possible that fewer
buyers would require sellers to produce a tax clearance
certificate (due to lack of knowledge of the law or perhaps
in exchange for a discounted price), which may require more
staff time and efforts to collect delinquent sales and use
tax.
c) Personal Property Tax Collection. Each year a local
county assessor mails business property statements to
various businesses located in the county. A business
property statement provides a basis for determining
property assessments for fixtures and equipment.
Businesses with personal property and fixtures that cost
$100,000 or more must file a business property statement
each year by April 1. Business inventory is exempt from
taxation.
In the case of a bulk sale, a prospective buyer is required
to inform the county tax collector of the prospective sale.
The notice must be accompanied by a completed business
property statement with respect to the property involved in
the sale. The notice allows the county to correctly
determine the seller's tax liability for the taxable year
in which the seller was in business. If a buyer fails to
comply with the bulk sale notice requirements, the buyer is
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liable for damages in the amount of any claims against the
seller. In the absence of the notice and the business
property statement, it would be virtually impossible for
the county to assess the seller's tax liability if the
seller goes out of business between January 1 and May 7.
Furthermore, the repeal of the notice requirement may
hinder the county's tax collection efforts. The Committee
may wish to consider whether to preserve the existing
notice requirement in the case of all bulk sales, not just
those involving tobacco or alcohol products.
6)Double-referral . This bill was double-referred with the
Assembly Committee on Judiciary and passed out of that
Committee on a 7-0 vote. For a more comprehensive analysis of
this bill, please refer to that Committee's analysis.
REGISTERED SUPPORT / OPPOSITION :
Support
California Commission on Uniform State Laws (sponsor)
Opposition
California Escrow Association
California Land Title Association
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098