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Who Pays The Sales Tax When Selling A Business?

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Comments & Replies: 2     Views: 3204     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.


This is another great reason to seek out the counsel of a professional when contemplating a business purchase or sale. Selling or buying a business is so much more complicated than any other purchase decision one might make throughout the course of one's life. It is also difficult to gain practice since a typical buyer or seller may only do this once or twice in a lifetime. Spending a minor amount of money for some advice in the beginning will save you a major amount in the future when it comes to buying or selling a business. Structuring the allocations to maximize the benefit for the buyer's financial position looking into the future is not something that should be taken lightly.


  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.

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.

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.

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.

Matt Sadati, Business Broker, SF Bay Area, Northern CA

I have Engineering and Law, JD degree, with over 30 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 33 businesses each having one to 30 branches.

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.

Michael Floorman, Business Broker, BTI, San Francisco Bay Area

Business Team, San Jose (Campbell) located in the Pruneyard Towers at Bascom and Hamilton. Established in 1981 Business Team with over 6600 sales to date has 1000 business listings to choose from, paid Google advertising. We offer highly trained and experienced professionals.

Helen Yoo: Escrow & Bulk Sale Services - Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.


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