Two often overlooked aspects of asset acquisitions relates to sales tax due on any of the specific assets acquired and successor liability of seller’s unpaid sales tax obligations.
Bulk Sale Exemptions
When a transaction is structured as the acquisition of net assets certain assets transferred to the buyer may be subject to sales tax. In most states, the sale of intangible assets, such as goodwill and intellectual property, are exempt from sales tax. However, the transfer of tangible personal property, such as equipment, is typically subject to sales tax unless a specific exemption applies.
Most states’ sales tax laws allow for occasional or isolated sale exemptions that can be applied to a business acquisition structured as an asset purchase. These exemptions apply to transactions that are outside the normal course of business. Since a company rarely contracts to sell all of its assets in a bulk sale, these occasional or isolated sale exemptions can be applied to asset acquisitions.
Nuances of Bulk Sale Exemptions
Each state’s exemption should be reviewed in detail for requirements particular to that state. It should not be assumed that all asset sales in those states are exempt from sales tax. For example, most states rules specifically exclude inventory from the definition of tangible personal property. However, in most transactions buyers are acquiring the inventory for resale to their customers. Accordingly, inventory can be acquired tax free in most states. Furthermore, in many cases, certain notice requirements must be met with the state’s taxing authority to avail a buyer of an exemption.
For those states which impose sales tax on the sale of tangible personal property, care should be taken when evaluating which assets are acquired and how the purchase price is allocated to those respective assets. The asset purchase agreement should also clearly define value assigned to avoid taxable and nontaxable assets being bundled together potentially making the entire purchase subject to sales tax. (See chart of states here.)
Successor Liability – Buyer Beware
Quite often buyers prefer asset acquisitions over stock acquisitions in order to avoid inheriting known or unknown liabilities. However, many states maintain successor liability provisions related to a seller’s unpaid sales taxes, even in an asset acquisition. Most states require either the purchaser or seller to notify the state’s taxing authority prior to a bulk asset sale. This enables the state one last chance to collect any unpaid sales tax obligations of the seller. States have various timeframes to respond with either a notice of unpaid sales tax liability or what is commonly referred to as a tax clearance certificate. Caution should be taken by a buyer to ensure notification of a bulk sale is made to the state with enough time for the state to issue a tax clearance certificate prior to closing the transaction. If a tax clearance certificate is not received prior to closing, consideration should be made to escrow funds until such clearance is obtained.
Recently many states have enacted sale tax provisions targeted at on-line retailers in light of the Supreme Court’s Wayfair decision. A buyer should place high importance on successor liability for sales taxes when acquiring the assets of an on-line retailer.
Often a buyer does not prioritize sales taxes in connection with an asset acquisition. Unfortunately, if care is not taken to assess the bulk sale rules, a buyer could end up paying more for acquired personal property. Worse, a buyer may unknowingly inherit a seller’s unpaid sales tax obligation.
Tad N. Render, CPA leads the M&A practice at Miller, Cooper & Co., Ltd., a Chicago-based accounting and consulting firm.