Selling a business isn’t as simple as just handing over the keys. There are lots of complexities involved, particularly when your company has open sales tax accounts. In this blog, we will examine common misconceptions and risks that both buyers and sellers often overlook, as well as practical steps you can take to help protect your sale.
Common Misconceptions About Sales Tax in Business Sales
“You can Transfer a Sales Tax Account”
False – The reality is that sales tax accounts are non-transferable in most states. Even if a business continues under the same name, a new owner must register to get a new sales tax ID and license. Attempting to use the seller’s sales tax accounts can result in compliance violations and delay the correct collection and remittance of sales tax.
“The business seller always remains responsible for any unpaid taxes.”
False – In many states, the new owner often will pick up the tab for any sales tax liability. There is a standard clause in many purchase agreements that the buyer will assume ‘known and unknown’ liabilities unless explicitly stated otherwise.
“Sales tax only matters in my state.”
False – For online sellers, sales tax nexus can apply in multiple states. Economic nexus laws, triggered by sales thresholds, commonly require the total sales or volume of sales, not just physical presence, to create obligations across the US.
“I filed a final sales tax return, so I’m covered.”
False – While it is essential to file a final sales tax return before closing the account and selling your business, there may still be some liabilities, such as missed filings and sales tax underpayments. Some states may initiate audits, and these liabilities can be traced back to the seller, who would retain responsibility for them.
Why Sales Tax Nexus Assessments are Critical for Buyers
Buyers need to conduct due diligence by performing a sales tax nexus assessment, which involves reviewing the business’s physical or economic presence, historical filing patterns, and any outstanding balances.
This process helps identify:
- Where the business has an economic or physical nexus
- Where it is registered and filed
- Where it should be registered, but might not be
- Any existing liabilities, penalties, or missed filings
Buyers should also request a tax clearance certificate, where available, to confirm that the seller is in good standing and has no outstanding back taxes. Without fulfilling this step, buyers could be hit with huge, unexpected tax bills and could inherit thousands of dollars in liabilities.
Best Practices for a Clean Sales Tax Exit
A proactive approach for both parties involved can ensure a smoother sales process and help avoid issues down the road.
For Sellers:
- Conduct a pre-sale tax review to review and rectify any outstanding issues.
- Update or close all sales tax accounts.
- Notify the Department of Revenues, the Secretary of State, and Local tax agencies (if applicable) of the sale.
For Buyers:
- Request a successor liability certificate where available
- Request a new EIN number
- Register for new sales tax accounts in every state where the business has nexus.
- Review the purchase agreement carefully and check for any inherited liabilities that may be associated with it.
- File any necessary notices with the Secretary of State.
Closing Sales Tax Accounts
This is a crucial step when selling your business. Some states require the following information:
- New owner’s contact information
- Sale price
- Sale contract/agreement
This information will help state agencies determine whether the sale creates successor liability for the buyer, whether the seller owes any taxes or final returns, and if the buyer needs to register for a new sales tax account.
LLC and Corporation Annual Reports
In a stock or membership interest sale, the buyer purchases the ownership of the entity itself and therefore takes the responsibility of filing the business annual reports with the necessary Secretary of State.
Most states require changes to the business entity or structure to be reported, such as:
- Registered Agent
- Business Address
- Officers or Members
This can commonly be done through the annual report or by submitting a ‘statement of information’ or a relevant form, depending on the Secretary of State.
Final Thoughts
Selling or buying a business involves numerous considerations and moving parts. Sales tax is often overlooked and can create unwanted headaches down the road, such as significant, unexpected liabilities and potential legal trouble.
It is recommended to treat sales tax compliance with the same level of care as financial statements and legal agreements. Performing proper due diligence will help both parties involved to ensure a smooth transaction.
Need help with sales tax compliance and sales nexus assessments?
RJM Tax Exemption offers a range of sales tax compliance services, including complimentary sales tax nexus assessments and assistance with successor liability planning. You can reach out to us or visit our website www.rjmtaxexemption.com.
