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Who Pays The Sales Tax When Selling A Business?

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Comments & Replies: 2     Views: 3848     Posted By: Timothy Cunha JD  



Topics: Buying A Business, Deal Structures, Escrow Closing Issues, Selling A Business     Tags: buying a business, deal structures, selling a business



Don’t be "surprised" by the sales tax when selling or buying a business.

In an ongoing transaction I’m handling, out-of-state buyers of a California business are insisting in making their purchase offer subject to the sellers paying the bulk transfer sales tax. Yes, sales tax on the sale of a business. As the broker for the seller, I am telling the potential buyers that this is not the custom in California; and, if they insist on this term, their purchase offer must be higher to cover this increased cost to the seller.

Often, buyers (and sellers) are surprised to learn that a sale of a business in California is subject to sales tax, just as if you were buying a piece of clothing or a new (or used) car. This tax is payable on the tangible property (in legal-speak, “chattel real” or “personal property”), often included in what’s called the “FF&E”—furniture, fixtures, and equipment. This would be things like computers, machinery, display cases, desks and chairs, kitchen equipment, vehicles, etc.; but, not intangibles, such as good will, custom software, intellectual property, etc.

In California, upon the sale of a business, the seller is responsible for collecting the sales tax; and, customarily, the buyer is responsible for paying the sales tax, as on any sale of merchandise in the ordinary course of business. Ordinarily, this is handled by the escrow agent at the closing.

Why does the buyer usually pay the sales tax? Besides it being the norm (we all pay sales tax when we shop, not the shop owner), in the bulk sale of a business, the allocation of the purchase price to the various assets is usually and mostly determined by the buyer; therefore, how much sales tax will be paid is largely in the buyer’s control. The more that is allocated to tangible assets, the faster that portion can be depreciated (over 5-7 years) rather than amortized (over 15 years). Since this is a long-term income tax advantage for the buyer, it only makes sense that the buyer should pay the sales tax. The trade-off for the buyer is: pay more for sales tax now and get an accelerated income tax advantage over time, or pay less sales tax and take longer to "write off" the purchase.

However, in the very few (seldom) situations in which the seller may want the sales-taxable FF&E allocation to be higher for their own accounting or tax purposes, a buyer may negotiate for the seller to pay some (or all) of the sales tax.


  Helpful Resources To Assist In Selling And Buying California Businesses

Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses

Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.

Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Prabhjot Randhawa, Broker: SF Bay Area, Northern Central Valley

I'm a Business Advisor at Liberty Business Advisors of San Fransisco. I have over 20 years of experience in all phases of entrepreneurship. During the past 15 years my concentration has been in business of mergers and consulting. I have owned and operated over 10 businesses.

Taj Randhawa, Business Broker Specialist - Gas Stations, Liquor Stores

If you are interested buying or selling a gas station, liquor store feel free to phone me for a consultation. My vast experience & specialization in gas stations & liquor stores helps me in serving my clients with full confidence, trust & sincerity. Serving Central Valley, SF Bay Area. 559-259-4247.

Jaime Ortega: Cannabis Industry Consulting & Due Diligence

We offer Cannabis Industry Consulting & Due Diligence Services to business buyers, owners, sellers, entrepreneurs throughout CA. We offer assistance with: licensing issues, cultivation facilities, products/ services, dispensaries, corporate strategy, & project management. Call 866-591-7802 for info.

Timothy Cunha, J.D., Business Broker, Northern California

Having managed and sold several businesses of his own, Tim offers business sellers extensive personal experience and professional expertise in building business value, planning a successful exit strategy, "packaging" and promoting the sale, and coordinating a successful sale. 844-237-6487 Toll Free.


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