When selling a business, the sales tax ramifications are often overlooked. Like any other retail sale, sales tax applies on the price allocated to the furniture and equipment as well as other tangible personal property. The more allocated to these assets, the greater the measure of sales tax. In the absence of any allocation of the purchase price between the taxable portion and the non taxable portion, the book value will be considered the sales price of the taxable assets transferred.
Per Regulation 1595, in the event the sale qualifies as an “occasional sale” the transaction is exempt. This occurs if the seller has made less than three sales in the preceding 12 month period. When counting these sales, include all sales – resales, taxable sales, interstate sales, and even sales that occur outside this state. For example, a wholesaler who has no taxable sales is still not an occasional seller. Accordingly upon the sale of that business, the tangible personal property would be subject to tax.
A typical example of a business qualifying as an occasional seller is a service business that is not required to hold a permit. These include accounting practices, law practices, medical practices, consulting businesses and the like. If a service business is required to hold a permit due to sales made that are incidental to their primary business, only the sale of assets related to the selling business is taxable. If for example, a hotel was sold, the beds and other room furniture would not be taxable but the kitchen and bar equipment (which are related to the selling activity) would be taxable. Likewise, a Laundromat might have a sellers permit for the sales of soap from a vending machine – when it’s sold the washers & dryers are exempt but the vending machine is taxable.
When tangible assets are sold in place by a business, the in place value may be excluded. In these instances tax is measured by the following formula: (Regulation 1596)
cost of items
——————————————————- x agreed price
cost of items & cost of attachment
Besides asset sales, companies may opt to sell their businesses by selling their stock. In these instances, there is no tangible personal property transferred so no sales tax applies.
To conclude, beware that there are sales tax consequences of selling assets of a business that has or should have a seller’s permit. By addressing these issues in the sales contract, the seller could obtain sales tax reimbursement from his buyer. If the sales tax issues are not addressed, the seller is still liable.
