Selling a business is a complex process that involves far more than negotiating a price and signing paperwork. One critical yet often misunderstood aspect of selling a business is determining who is responsible for paying sales taxes once the sale is finalized. Whether you’re selling equipment, transferring ownership of a business entity, or dealing with intangible assets like intellectual property, understanding the rules surrounding sales tax is essential for a smooth and compliant sale.
Who Is Responsible for Sales Taxes During a Business Sale?
When selling parts or the entirety of a business, the responsibility for sales tax may depend on several factors, including:
- What is being sold (assets, ownership interest, or the entire business)
- The type of business structure (sole proprietorship, partnership, LLC, etc.)
- Bulk sale rules
- State-specific laws and local tax jurisdictions
- Prior unpaid tax liabilities
- Industry-specific rules
- The terms negotiated between the buyer and seller
In most cases, the seller is responsible for collecting and remitting any sales tax due on the transaction, while the buyer indirectly pays this tax as part of the purchase price.
However, sales tax does not apply universally, and certain components of a business sale—such as intangible assets, goodwill, or real property—may be exempt. Both parties must understand their obligations to ensure compliance and avoid potential liabilities.
Seller’s Responsibilities
In a business sale, the seller is typically required to handle the collection and remittance of sales tax on taxable portions of the transaction. This primarily applies to the sale of tangible personal property, such as equipment, machinery, furniture, or inventory. The seller is responsible for determining which items are taxable under state law and collecting the appropriate tax amount from the buyer. After the sale, the seller must remit (i.e., send/pay) this tax to the state’s revenue department. For example:
If a seller charges a buyer $10,000 for equipment and the sales tax rate is 8%, the total sale amount is $10,800. The seller keeps $10,000 as revenue but must remit the other $800 to the state as sales tax.
Additionally, sellers should ensure that all their past tax liabilities are fully paid before closing, such as sales, payroll, or income taxes. Many states allow buyers to hold sellers accountable for unpaid taxes, meaning sellers who fail to address these obligations may cause delays in the transaction or risk legal disputes. Sellers may also be required to provide buyers with documentation, such as a tax clearance certificate, to confirm they have no outstanding tax debts.
Buyer’s Responsibilities
While the seller usually collects and remits sales tax, the buyer bears the indirect responsibility of paying it as part of the purchase price for taxable items, as shown in the example above.
In some states, buyers also share a direct responsibility for ensuring that the seller has no unpaid tax obligations at the time of the sale. To protect themselves, buyers should request a tax clearance certificate from the state’s tax authority before closing. This verifies that the seller has no outstanding tax liabilities, safeguarding the buyer from inheriting these debts.
In states that impose a general sales tax, the buyer is also typically required to provide a resale certificate if they are purchasing inventory for resale. This allows the inventory to be exempt from paying sales tax upfront.
Sales Tax in Common Scenarios
Asset Sale
In an asset sale, the buyer acquires specific assets of the business, such as equipment, inventory, or intellectual property, while the seller still retains the business entity itself. Sales tax typically applies to tangible personal property (e.g., inventory or machinery), while intangible assets like goodwill, customer lists, or intellectual property are generally exempt. For example, if a buyer purchases a restaurant’s kitchen equipment, tables, and chairs, sales tax would most likely apply to these items.
Note that real estate included in an asset sale is usually exempt from sales tax, as it would instead be subject to real estate transfer taxes.
Entity Sale
In an entity sale, the buyer purchases ownership of the business entity (e.g., shares of a corporation or membership interests in an LLC). Since the transaction involves the transfer of ownership interest rather than individual assets, sales tax generally does not apply. For example, if a buyer purchases 100% of the shares of a retail business, they are not required to pay sales tax on the transaction, as the entity’s ownership is simply being transferred.
Bulk Sale
A bulk sale occurs when a business sells all or most of its assets outside its normal course of operations. Many states offer exemptions or special rules for bulk sales, often designed to prevent the seller from avoiding taxes or creditors. Buyers involved in bulk sales may be required to file a bulk sale notice with the state and withhold a portion of the purchase price until the seller provides proof that all taxes have been paid. For example, a buyer purchasing the entire inventory, equipment, and customer database of a store may be required to verify that the seller has cleared all tax obligations.
Additional Considerations
- State-Specific Laws
Sales tax rules vary by state, including what assets are taxable, requirements for bulk sale notices, use of resale certificates, and whether tax clearance certificates are needed.
- Local Tax Jurisdictions
Tax rules and rates can vary by city or county, so it’s important to account for local regulations to calculate taxes accurately.
- Industry-Specific Rules
Certain industries may have unique tax exemptions or requirements. For example, agricultural equipment and intellectual property sales may be treated differently.
Timing and Compliance
Proper timing of tax remittance and compliance with filing deadlines, such as submitting bulk sale notices, helps both parties avoid penalties or legal issues.
Consulting with tax professionals, accountants, and attorneys who specialize in business sales can help ensure that any and all tax liabilities are handled properly, ensuring a smooth and successful sale.
Understanding who is responsible for sales taxes when selling a business is crucial for avoiding legal and financial pitfalls. By knowing the rules, negotiating clear terms, and seeking professional advice, both buyers and sellers can ensure a smooth and compliant transaction.
Whether it’s a simple asset sale or a complex transfer of ownership, proper planning will help you understand what your tax responsibilities are and allow you to close the deal with confidence.
To see how The FBB Group can assist you through the business sale process, contact us online today.