Avoid sales tax surprises when buying or selling a convenience services business

Sales and use taxes — more commonly known as sales tax — are generally assessed at the retail level in the transaction flow. For example, when you purchase a taxable item, the retailer has an obligation to separately charge state sales tax, collect the tax from the customer, and file a return with the appropriate tax jurisdiction.

When an item is purchased from a vending machine, the sales tax is included in the “sold amount” of the item. Ultimately, it is the seller’s responsibility to remit the sales tax collected to the tax jurisdiction in the manner prescribed by the tax authorities.

Most vending operators understand the need to remit sales tax on vended items. What is less known is that there are major sales tax issues for certain non-retail transactions: specifically, the purchase and sale of a business. This article will detail the significant sales tax issues related to the purchase and sale of a business. We will focus first on the sales tax issues the seller needs to consider, and then on the sales tax issues for the buyer.

Sales tax issues for the seller should consider

Over time, state tax authorities have broadened the scope of sales tax to include the sale of services and certain non-retail transactions. The treatment of sales tax on the sale of a business will depend on whether the sale is a sale of assets (i.e., vending machines) versus the sale of stocks.

Sale of assets

Sales tax generally applies to the sale of tangible personal property (TPP). Assets are typically considered TPP, so you must account for the potential effect of structuring a sale as a sale of assets for sales tax purposes. Because a sale of assets does not normally occur in the normal course of business, many states maintain an ‘‘occasional or isolated sales’’ exemption that can be applied to asset purchases.

Not all states exempt occasional sales, however. Specifically, Colorado, Oklahoma, New York and Wyoming do not have general occasional sales exemptions. Additionally, other states have limitations on their exemption. For example, states such as California, Idaho, Kansas, Louisiana, Mississippi and Pennsylvania place restrictions on the exemption as applied to various vehicles.

Another issue arises regarding inventory. Most isolated or occasional sale exemptions specifically exclude inventory from the list of exempt assets. In most asset purchases that include inventory, the sales tax liability is not applicable because the buyer purchases inventory for resale. In most states, the inventory can be purchased tax-free as a purchase for resale.

Finally, some states provide additional requirements that must be satisfied before the exemption can be applied to the sale of a business. For example, in some states, to qualify for the exemption, the transaction must include ‘‘the entire operating assets of a business or of a separate division, branch, or identifiable segment of the business.” Thus, an occasional sale of one or two tangible assets by a business may not qualify for the exemption.

As you can see, there are many significant sales tax issues related to the disposition of a business by the sale of assets. We strongly recommend that you have a sales tax professional review the transaction to ensure it meets the tax jurisdiction’s requirements.

Sale of stocks

In most states, sales of intangible assets such as stocks are not subject to sales tax because it is not a sale of tangible personal property (TPP). It is commonly understood that buyers of stock or similar ownership interests in a business will inherit all of the known and unknown liabilities of that business along with its ownership interests.

All historical liabilities, including tax liabilities, continue after the transaction because the legal entity remains in existence and is responsible for its liabilities. The seller of the business in a stock sale should, therefore, ensure that there are no significant sales tax issues; otherwise, those liabilities could derail the transaction if discovered during due diligence — and impact the sale price or the entire sale.

Successor liability: Sales tax issues for the buyer to consider

Even though some states do not have statutory successor liability provisions, they still often aggressively pursue the collection of historical or transactional liabilities from the buyer by using other legal doctrines. Whether the economy is struggling or booming, states have an interest in collecting sales tax revenue owed, and it is generally much simpler to seek payment from the current operations of the business than attempting to collect from a former owner who is no longer doing business in the jurisdiction or even in existence.

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 notifications provide state taxing agencies the opportunity to collect taxes due while the seller has money or assets from which to make a 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.

Many states provide specific guidance on how a purchaser may avoid successor liability. The guidance usually includes two main actions:

Withholding of an escrow to cover potential unpaid taxes and customer loss.
The filing of tax clearance requests with the state to support that no taxes are due by the seller.

In general, when one or both of these actions are not taken by a purchaser, the purchaser remains liable for the unpaid taxes of the seller.

In some cases, the states require the reporting or request for tax clearance to occur before the transaction. In New York or Pennsylvania, for instance, a 10-day advance notice of the transaction is required to be filed by the seller. All states do not provide for statutory relief from successor liability.