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Who Pays The Sales Tax When Selling A Business?

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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.

The fact that the escrow officer handles the tax issue at the close of escrow is a reminder that it is so important for a business to actually go through a business escrow, a mistake that many "For Sales by Owner" agreements make, when they often forgo this step. A business escrow officer will make sure that all outstanding debts, levies, and taxes are paid off upon the close of escrow, and payment are properly sent off to the correct parties and state agencies, which benefits both buyer and seller, and a make for a clean transaction. Early in the transaction, I always visit the seller and create and list of all the fixtures, furniture, and equipment that is included in the sale, and have both the buyer and the seller sign and date it, because unless early agreed upon, I have seen sellers try to take items out of the store before escrow closes, that the buyer previously thought was included, such as expensive TVs, etc. If a seller wants to take something with them that they have sentimental value to, such as a family heirloom, which resides in the business and they plan to take, then it should be written down and agreed upon with the buyer early on, so as to avoid a disruption later on.

BizBen Blog Contributer Buying a Business

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