Sales tax issues to avoid

If the current torrid pace continues, mergers and acquisition could reach $4.58 trillion worldwide this year, the highest level on record, according to The Wall Street Journal. Clearly, the rewards of acquiring another business can be great. Yet such transactions are complicated and may be fraught with legal and regulatory issues if not managed wisely.

Tax issues in particular play a heavy role, as they greatly impact the economics of any deal. With each side attempting to maximize its return, taxes – especially sales taxes – must be carefully addressed before signing on the dotted line. Money due in taxes means less ROI for the buyer and/or seller.

While both the seller and purchaser may devote significant time to the performance of due-diligence procedures, they often overlook sales tax considerations. And unresolved sales tax issues can sink an otherwise good-looking deal.

Generally, purchasers can acquire another business through either an asset sale or stock sale. Since sales tax is generally imposed on the sale of tangible personal property, the acquisition of a business enterprise through a stock sale generally will not be subject to sales tax. For other good and valid reasons, however, purchasers may want to structure the acquisition of the business as an asset sale.

- Advertisement -

These asset sales – all or part of the business’ assets are transferred – are commonly referred to as bulk sales for sales tax purposes. Since these asset sales or bulk sales constitute, at least in part, the sale of tangible personal property, they will be subject to sales tax unless a specific exemption applies.

A common exemption available to purchasers for asset sales is the “occasional, casual or isolated sale” exemption. An occasional-sale exemption generally will exempt the acquisition of assets that are sold in bulk or otherwise outside of the ordinary course of business.

Most states provide such an exemption, although the scope of the exemption varies among states. For example, California provides that if a particular transaction occurs more than twice in a 12-month period, then it does not qualify as an occasional sale.

Many states also specifically exclude the transfer of inventory from the occasional-sale exemption, since the transfer of these items is within the ordinary course of business. A purchaser may avoid the imposition of sales tax on inventory, however, by providing a resale-exemption certificate to the seller at the time of purchase.

Colorado, New York [with dollar limitations], Oklahoma and Wyoming are the only states that do not provide for any sort of occasional-sale exemption. In those states, purchasers have to rely on other available exemptions to partially or completely avoid the imposition of sales tax.

Many states require one of the parties to an asset or bulk sale of a business to provide the state taxing authority with notice of the proposed sale. Such notification provides state taxing agencies the opportunity to collect taxes due, while the seller has money or assets from which to make payment.

If notification is not given to the state, then the purchaser will have successor liability for sales tax purposes and will become liable for any unpaid sales and use tax of the seller. •

Tarra Curran is a managing director in the Tax Group at CBIZ Tofias, which has offices nationwide, including in Providence and Boston. She can be reached at TCurran@cbiztofias.com.

No posts to display