Generally when a business is sold, the amount allocated to tangible assets (other than inventory) is subject to sales tax. There are, however, numerous exceptions to this rule.

Exception I - Occasional Sale

If a service business or other business that does not have or need a sellers permit is sold, the bulk sale of assets will normally qualify as an exempt occasional sale. There are, however, certain caveats that even these businesses need to be aware of. For example, lets say a CPA practice started doing a lot of computer consulting. Lets also say this led to the sale of both computer hardware and software. If this activity became a significant source of revenue, the future sale of the practice's assets would become taxable.

Another example may be a laundromat selling soap in its dispensers. If the laundromat were sold in a bulk sale transaction, the sale of the equipment would normally be exempt since the soap sales are incidental to the entire operation as a whole. If there were two or more previous sales of washers and dryers in the last 12 months, however, the occasional sale exemption would not apply.

The occasional sale rule does not apply to vehicles, vessels or aircraft.

Statutory Mergers

Tax does not apply to a transfer of property pursuant to a statutory merger under Sections 1100-1135 of the California Corporate Code or similar laws of other states.

Transfers to Commencing Corporations Solely in Exchange for Stock

If existing liabilities are transferred into a commencing corporation, the transfer is not solely in exchange for stock. For example, suppose an individual transfers the following assets and a $20,000 liability to a newly formed corporation:

Item Value

Equipment $ 50,000

Inventory 20,000

Total Assets Transferred $ 70,000

Consideration Received:

Value of 50% Interest in Corporation $ 50,000

Assumption of Debt by Corp. 20,000

Total 70,000

The amount subject to tax would be computed as follows:

50,000

Percent of Taxable Assets To Total = ------- = 71.4%

70,000

X Taxable Consideration x 20,000

Amount Subject to Tax = $ 14,285

Also, remember the Beatrice case discussed in February, 1994's Sales and Use Tax Review & Update discussing the transfer of liabilities from a parent to a subsidiary. Even if the seller continues to be liable on the debt the transfer of liabilities triggers the sales tax.

Transfers Of 80% Or More Of All Tangible Property With No Substantial Change In Ownership

The typical example here would be a sole proprietorship or partnership incorporating. If a sole proprietorship transfers to a partnership or to a corporation and owns less than 80% of the new entity, the change in ownership is a problem.

Sales Of Machinery, Equipment, And Fixtures Affixed To Real Property

These sales are not subject to sales tax when their removal is not contemplated by the seller or buyer. If the lessee of the land or building has the right to remove the affixed property under the terms of the lease or as trade fixtures under Section 1019 of the Civil Code, their sale is taxable. If the sale is taxable, the in place value could be excluded from the gross receipts.

Sale Of Stock

If a business is sold by selling stock, no sales tax would apply.

Conclusion

Business sales are complex. This is not an exhaustive list of exceptions to the taxability of assets nor a complete explanation of each exception. It is, however, a broadbrush look at the type of exceptions that exist.

Editor's Note

Special thanks to Cameron Hess of Hefner Stark and Marois for his contribution to this article.