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Who Pays The Sales Tax When Selling A Business?




Comments & Feedback From Pro Intermediaries & Pro Advisors On BizBen:

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.



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