Tax implications triggered by the sale of a business can get complicated when you add state-based tax codes to the mix. Depending on the state in which the business operates (or where the owner lives if an all-stock sale is contemplated), the seller may have to manage the potential for significant state income taxes on the profit from of the transaction.
These impacts may vary based on the legal structure of your business (Limited Liability Company, corporation, sole proprietor, etc.) But, here are some of the state tax ramifications on which a business seller needs advice:
- If multiple states are involved, the location of specific assets will drive up or down the potential tax bill. Recent history plays a role here, too. A state may not appreciate last-minute moves of business operations, or of assets owned, that can be characterized as a tax-avoidance maneuver.
- Some states do not have any long-term capital gain taxes on the books, which isn’t necessarily good news: A gain on an asset sale that qualifies as a long-term capital gain for federal purposes may be subject to ordinary income tax rates in those states. That is true for California, for example.
- Stock sales are usually taxed in the state of residence of the selling owner, even if the company conducts its business in other states.
Note: If the stock sale is treated as a “deemed asset sale,” state tax authorities in states where the sold business operates may “look through” the assets the business owns and assess taxes on the gain-on-sale of those assets located in that state. (These levies have been challenged successfully in some cases, but do you want to have to go through the process of challenging a tax bill? Better to plan ahead to avoid such a situation!)
State sales and use taxes must also be considered in any transaction.
- Stock transactions are usually not subject to sales, use or transfer taxes. Some states have stamp taxes, and may decide your stock transfer qualifies. This possibility needs to be investigated ahead of time too.
- Asset sales should be carefully analyzed to determine whether a sales or use tax might apply.
Most states tax the transfer of tangible personal property from a seller to a buyer. Within that tax calculation, though, when the entire business is sold there may still be an “isolated or occasional” or “casual” sale exemption for business assets that are not regularly sold in the seller’s business. Assets owned by the business would have to be examined in detail to figure out where exemptions may apply. Just a few areas to consider are:
- Such exemption rules do not typically apply to the transfer of motor vehicles owned by the business, as they will require individual retitling, and incur a registration fee of some kind.
- A resale exemption may be available for buyers of inventory that are resold.
- Real estate will usually require real estate transfer taxes be paid, as well. Some states even charge such a fee on the real estate involved in an all-stock corporate sale.
Finally, it is important to know that some states may also require a pre-sale notification be submitted regarding a potential transaction, and whether it is the Seller or Buyer of the business who is responsible to file. The New York State Department of Taxation and Finance, for example, imposes a liability and obligation on the “purchaser” of a business transaction occurring in the State of New York. The buyer must provide the State with a “pre-closing” notification of the proposed business sale, the terms of the sale and the anticipated date of closing.
If a required notification is not submitted, and a “tax clearance certification” not obtained, the buyer could be on the hook for the seller’s unpaid sales or use tax, and unpaid employee state wage tax withholdings. That might seem advantageous for you if you are the seller, but it would likely land you in court over the outstanding obligations.
The bottom line on state-based tax obligations when selling a business? Do not try to become your own expert. Get professional advice and plan well in advance of putting your business up for sale.