Know sales tax liabilities

If you are acquiring or thinking about acquiring a company, don’t overlook your sales tax liability. Failing to adequately address successor liability on the front end of the deal may put you on the hook for sales and use tax not paid by the seller for the transaction.

Tax is generally imposed on the sale of tangible property, including a business. You may be able to reduce your sales tax obligations and the associated successor liability, but to take full advantage of the structuring, exemption and planning benefits available, you need to evaluate these opportunities before closing the deal.

Transactions take one of two legal forms. They can be conducted through the sale of assets, which is subject to sales tax, or through a stock sale (sale of ownership interests), which generally is not subject to sales tax.

Most of the time purchasers will want to structure the acquisition of the business as an asset sale. Purchasers prefer the asset sale because they’ll be able to take tax depreciation/amortization of the acquired assets and intangibles, which they would not be able to do with a stock acquisition. The asset sale also generally exempts the purchaser from liabilities for improperly paid taxes related to the acquired assets.

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Transaction structures can get tricky. Sales of ownership interests may be treated as asset sales for tax purposes in some circumstances. The Section 338(h)(10) election allows C corporations and S corporations to use the asset-sale tax treatment for acquisitions of any of the following types of corporations: subsidiaries in a consolidated group, subsidiaries eligible to file consolidated returns and S corporations. Individuals, partnerships and limited liability corporations may use the asset-sale tax treatment for acquisitions of the same types of corporations with the Section 336(e) election.

Besides the depreciation/amortization opportunities available, asset sales come with sales tax considerations. Transactions where all or some of the business’ assets are transferred are commonly referred to as bulk sales for sales tax purposes. Because these asset sales or bulk sales constitute, at least in part, the sale of tangible personal property, they are subject to sales tax unless a specific exemption applies.

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

Rhode Island places a limit on the number of exempt sales per year; businesses and individuals who make more than five bulk-asset purchases in a calendar year will not qualify for the occasional sale exemption.

Another common exemption is the “sale-for-resale” exemption. In Rhode Island, wholesale resellers and other qualifying resale purchasers must complete a resale certificate to qualify.

Even if an exemption applies for the purchase of a business, sales tax considerations may persist.

Sale-for-resale situations may have unique successor-liability considerations. In Rhode Island sale-for-resale situations, sellers that can demonstrate the purchaser’s sale-for-resale exemption are relieved of liability from improperly claimed sales tax exemptions. Rhode Island sellers can produce either the Streamlined Sale Tax Certificate of Exemption or the Rhode Island Resale Certificate to meet this requirement. Generally, purchasers in an asset-sale situation will have successor liability, so purchasers should factor that liability into their buy-side due-diligence considerations.

The second of this two-part column will appear next week. •

Tarra Curran is a managing director at CBIZ Tofias.

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