Building Your Business Business Taxes How Does Bulk Sales Law Work? State and Federal Fraudulent Transfer Laws By Jean Murray Updated on September 13, 2022 Fact checked by J.R. Duren In This Article View All In This Article Laws Affecting Bulk Sales Determining Illegal Bulk Sales How to Comply With Bulk Sales Laws Frequently Asked Questions (FAQs) Photo: Morsa Images / Getty Images A bulk sales law isn't about selling in bulk. Rather, these federal and state laws are about companies selling business assets to one buyer outside of the normal course of business. Bulk sales are sometimes called "bulk transfers" because they are often transferred to another business entity. Key Takeaways Bulk sales laws are meant to protect creditors from businesses that sell assets in an attempt to avoid paying creditors and, in some cases, to prevent businesses from evading sales taxes.Bulk sales laws tend to fall under the Uniform Commercial Code.Most states have repealed bulk sales laws, but some still use them.Before selling your business's assets in bankruptcy, check with your lawyer or trustee to ensure the sale follows the applicable laws. Laws Affecting Bulk Sales State bulk sales laws are enacted to prevent businesses from avoiding sales taxes. Federal laws on bulk sales relate to preventing attempts to keep assets from creditors in bankruptcy. State bulk sales laws fall under the Uniform Commercial Code (UCC) since they involve credit. Each state has its own UCC regulations and each state handles bulk sales differently. In Pennsylvania, for example, bulk sales regulations kick in when more than 51% of a business's assets are sold or transferred. At this point, a bulk sale clearance certificate is required. On a federal level, several laws and procedures, including the Federal Rules of Bankruptcy Procedure, both apply to bulk sales or transfers for businesses in bankruptcy. The bankruptcy court requires notices to sell assets and fair procedures to make sure assets are not sold for less than their value. But you can sell assets in bankruptcy if you follow proper procedures. The bankruptcy code provides that transfer taxes won't be applied if the sale takes place under bankruptcy rules. The penalties for violation of bulk sales laws depend on federal bankruptcy laws and on bulk sale laws in the state where the bulk sale took place. Generally speaking, laws regarding bulk sales exist for two important reasons: In business bankruptcy, laws prohibit businesses that are in the bankruptcy process from selling or transferring assets to avoid having to give the assets to creditors or transferring them for less than they are worth.Some businesses attempt bulk sales or transfers to avoid sales taxes. The sales taxes must be paid by the buyer. Note Most states have repealed bulk sales laws, but a few still have them. Determining Illegal Bulk Sales If a company is going out of business and it sells its inventory at an auction, with many buyers at fair value, it likely isn't a fraudulent bulk sale. While the auction isn't in the ordinary course of business, it is public and the assets can be counted and the proceeds used in the bankruptcy process. Before a bulk sale, in some jurisdictions, the business must file some kind of statement or affidavit to let creditors know that the sale is taking place. States require registration of bulk sales so that the sales taxes due can be collected. In New York, for example, the purchaser must notify the state of a pending bulk sale by completing a form reporting "Notification of Sale, Transfer, or Assignment in Bulk." Bulk sales that don't follow state or federal rules can be in jeopardy of being illegal. Bulk Sales Effect on Credit Many businesses, including especially retail businesses, operate on credit. They buy inventory on credit hoping to sell it for a profit before the credit terms come due. Selling these assets in bulk to avoid creditors causes two problems: The assets haven't been paid for yet, so that specific creditor doesn't get its moneyAssets are gone, so they can't be sold to pay off the creditor Fraudulent Transfers Fraudulent transfers are similar to bulk sales. These transfers are fraudulent because they attempt to defraud creditors in bankruptcy by transferring assets out of one business to another or selling them for less than they are worth. In these cases, the business moves assets to a related company or another company owned by the same owner. The creditors are deprived of the money from the sale of these assets. How to Comply With Bulk Sales Laws To avoid problems with bulk sales laws, don't make any transfers that could be seen as a bulk sale without checking with your attorney. If your business is in bankruptcy proceedings, be sure to check with your attorney or your trustee (if you have one) before you make any decisions. Note If you are considering a sale or transfer of assets, contact your attorney and alert the buyer that sales tax may have to be charged. Frequently Asked Questions (FAQs) What are the rules for a bulk transfer? In general, the rules for a bulk transfer are based on the state the transfer takes place in. Typically, you'll have to file a notice of sale so your creditors are aware the sale is taking place. What is a bulk sales transaction? While the rules and laws for bulk sales may change from state to state, a bulk sales transaction is a sale or transfer that takes place outside of the normal course of business and involves more than 51% of a business's assets. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Thomson Reuters Practical Law. "Glossary: Bulk Sales Laws." New York State Department of Taxation and Finance. "Bulk Sales." Pennsylvania Department of Revenue. "Bulk Sales Notice." Uniform Law Commission. "Article 6, Bulk Sales." Uniform Law Commission. "Uniform Commercial Code." United States Courts. "Federal Rules of Bankruptcy Procedure," Page 75. Goe Forsythe & Hodges. "Selling or Liquidating a Business Through a Chapter 11 Bankruptcy Case." Friedland, Irvin J. "Sales: Rights of Buyer's Judgement Creditors Under Fraudulent Bulk Sale." Marquette Law Review. Page 537. Clark, Dean. "Bulk Sales Under the Uniform Commercial Code." Wyoming Law Journal. Page 30. American Bankruptcy Institute. "Understanding FMV in Bankruptcy." King & Spalding. "Bankruptcy Litigation: Fraudulent Transfers," Page 1.