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Who Pays The Sales Tax When Selling A Business?

Comments & Replies: 2     Views: 20266     Posted By: Timothy Cunha JD  Timothy Cunha JD: Business Broker, SF Bay Area



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
Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA

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 Service - 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.

Elizabeth McGovern: Escrow Services - San Francisco 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.

Timothy Cunha JD, Business Broker: SF Bay Area

SF Bay Area experienced attorney, & business broker. I & my EvergreenGold team offer owners sound advice & expertise to build business value & achieve profitable sales. Call today for a FREE business evaluation & SWOT analysis for your business. Call me direct at 650-600-3751, 650-866-5393 Text.

Steve Zimmerman: Restaurant Broker Specialist, California

Steve founded Restaurant Realty in 1996. He has personally sold/leased over 900 restaurants, bars & clubs, & completed over 3000 valuations. The author of "Restaurant Dealmaker - An Insider's Trade Secrets For Buying a Restaurant, Bar or Club" available on Amazon. Reach Steve direct at 415-945-9701.

Mike Brewer: Liquor License Broker, ABC Consulting Service

Liquor license brokerage and consulting services. We provide: Alcohol License Transfers Application Consulting & Processing, Liquor License Purchases & Sales, City Zoning Permits & Land Use Entitlements, Public Convenience or Necessity Findings and Letters. Phone Mike Brewer direct at 800-437-1100.

Harry Sidhu, CBB, Broker: SF Bay Area, Central Valley, SAC Region

Assisting both sellers and buyers of businesses - dealing mainly with Liquor Stores, Grocery Markets, Gas Stations, Smoke Shops, Restaurant Related, Retail Related, Service Related. Serving SF Bay Area, North Bay, Sacramento area. Call Harry Sidhu, CBB for assistance at 510-366-6130.

Julieanna Wakileh, Business Broker: PreSchool Center Specialist

I have 30 years of experience, working, founding, owning, operating, consulting, and selling preschools. I'm very knowledgeable with procedures that are required for selling preschools. My practice, knowledge and education is ideal for the sale of preschool centers. 925-451-2884 Cell/Text.


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