Sales Tax Issues Associated with Acquiring a Business

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The economic recovery since the Great Recession has allowed many businesses the flexibility to look for growth opportunities. As a result, many pundits are optimistic that mergers, acquisitions and other business restructurings will increase in 2014 and for the foreseeable future. Although the rewards of acquiring another business can be great, such transactions are complicated due to the various tax, legal, and regulatory issues involved. While both the seller and purchaser may devote significant time to the performance of due diligence
procedures, they often overlook sales tax considerations.

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Sales Tax Issues Associated with Acquiring a Business

  1. 1. 1 | P a g e July 2014 Let the Buyer Beware: Sales Tax Issues Associated with Acquiring a Business The economic recovery since the Great Recession has allowed many businesses the flexibility to look for growth opportunities. As a result, many pundits are optimistic that mergers, acquisitions and other business restructurings will increase in 2014 and for the foreseeable future. Although the rewards of acquiring another business can be great, such transactions are complicated due to the various tax, legal, and regulatory issues involved. While both the seller and purchaser may devote significant time to the performance of due diligence procedures, they often overlook sales tax considerations. Is the Sale of a Business Subject to Tax? 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. These asset sales, where all or part of the business’s 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” (“occasional 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, 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. Bulk Sale Notification and Successor Liability 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.
  2. 2. 2 | P a g e What Should Purchasers Do? While bulk sale notification rules protect purchasers from successor liability for sales tax purposes, they are time-consuming and cumbersome. The notification rules are essentially an invitation for the state tax agency to audit the seller. Given that each state has its own unique process, a potential transaction could be delayed by months waiting on the tax clearance certificate from the state tax agency. Once a clearance certificate has been granted, the state may require the buyer to place sufficient funds in escrow to cover any potential tax liability owed. For these business reasons, it is not uncommon for purchasers to opt out of the notification requirements and rely on the seller’s representation that it has complied with all of its sales tax obligations. If the purchaser opts out of the notification requirements, then it should require that the seller perform a sales and use tax review prior to the acquisition to identify any areas of exposure and minimize successor liability issues. The most common types of issues relate to failure to collect and remit sales and use tax and incorrect nexus or taxability determinations. Once these issues are identified, the seller can take corrective measures to minimize any potential successor liability for the buyer. The most effective way to mitigate sales tax exposure is for the seller to enter into voluntary disclosure agreements (“VDA”) with states where it has nexus but is not currently collecting or remitting sales tax. By having the seller enter into VDAs, the purchaser is assured that the seller is current with its sales and use tax obligations thereby minimizing the risk of successor liability. Additionally, when purchasers waive the notification requirement, they should also require the incorporation of indemnification provisions into the sales contract. These provisions create a private right of action whereby the purchaser can be indemnified by the seller for any unpaid sales and use tax incurred while the business was operated by the seller. Indemnification provisions may involve the escrowing of funds to cover any sales tax successor liability issues that arise. If funds are not put into escrow, then the purchaser would rely solely on the seller’s ability to pay at the time such liabilities are identified. Depending on the seller, this could make the indemnification provisions of little, or no, value to the purchaser. As a result, it is advisable to place funds in escrow to cover potential sales and use tax liabilities if it is uncertain that all obligations have been satisfied. Closing the Deal Sales tax liability can result in a significant unexpected cost relating to the sale or purchase of a business enterprise. Parties, especially purchasers, to a sale of a business should be aware of the sales and use tax ramifications of not only the transaction but also successor liability issues. While not all purchasers may be able to avail themselves of bulk sale notification rules, there are steps that purchasers and sellers can take as part of their due diligence to minimize or even eliminate successor liability. For more information concerning how sales tax issues relating to the purchase or sale of a business enterprise may impact your business, contact your CBIZ MHM tax advisor.
  3. 3. 3 | P a g e Copyright © 2014, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein. CBIZ MHM is the brand name for CBIZ MHM, LLC and other Financial Services subsidiaries of CBIZ, Inc. (NYSE: CBZ) that provide tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies.

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