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Just Elementary, Inc. » Business Tips, Due Diligence » Who Pays Sales Tax on FF&E for a Bulk Sale Escrow

Who Pays Sales Tax on FF&E for a Bulk Sale Escrow

When buying and selling a business in California, there is the not so little matter of paying sales tax.  Yes, sales tax when buying a business, just like you would pay sales tax on a pair jeans at the department store.  The theory is that when you are buying a business, you are not just buying the Goodwill, but you are also buying tangible equipment critical in the operation of the business.  That tangible property is known as Chattel Real, which is also known as Personal Property.

Furniture, Fixtures and Equipment (FF&E) are things such as a POS systems (Cash Registers), CNC Machines, Lathes, Mills, Kitchen Equipment (for eateries), etc..  So who pays?  In California the Seller is responsible for collecting the sales tax and remitting the payment to the State Board of Equalization (SBOE).  In the negotiation of a purchase contract for a business, it is the standard custom for the buyer to pay the sales tax bill as they are buying the business and its FF&E.

The State Tax People

However, this is not written in stone, so a buyer may negotiate to have the seller pay some or all of the sales tax due.  Why should a seller pay some of the sales tax?.  In the cases where we have had seller’s chip in, most of the time it is because of concessions in other areas of the transactions.   To a certain degree, the buyer and his financial advisors may feel that they should allocate more of the Transaction Purchase Price into the FF&E.  In those cases, where the buyer is motivated by post close of escrow tax ramifications, the seller should have less of an expectation to help out, as the sales tax bill is being increased for greater depreciation benefits for the buyer.

Some FYIs:

  • Coin Laundry/Laundromats do not have sales tax due on the value of the washers and dryers during a sale to a buyer.  Sales tax is due on vending equipment though.
  • In the past, if the business that is being sold does not have a permit with the SBOE, then the SBOE would reject and return sales tax payment to escrow, because there was no account number for the business with the SBOE.
  • The SBOE is being stricter than ever on collecting sales tax when a business is being transferred in any format.  One of the escrow officers we work with told us that the SBOE manage to collect the full sales tax amount on the cost of the build out of a failed business that ended up selling for pennies on the dollar.
  • What this means for you is to budget for the Sales Tax bill when buying a business, and always work with a good escrow company.
  • If a business has no tangible FF&E and property useful in the operation, then, lucky for you, most likely no sales tax is due upon the close of escrow.

If you have any questions or would like help with your situation, please contact our Client Care Manager Sonia Chhabra at  (888) 926-9193 or email cs@justelementary.com

 

     

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