Purchases and sales of businesses operating in the United States offer state and local tax planning opportunities. The state and local tax risks and rewards are different from those involving federal income taxes. While these state and local tax considerations are often overlooked, they exist in all types of transactions, whether involving stock transfers or asset transfers.
This State Tax Alert is the second of two parts and highlights issues important to business sellers. Part I highlighted important state and local tax issues raised for purchasers of the stock or assets of another business and is contained in State Tax Alert, volume I, issue 8.
I. General Observations for Sellers.
A seller of a business must consider its and its purchaser’s state tax issues. In considering the purchaser’s issues, the seller should review the items discussed in Part I as these may affect the business’s sales price. The seller should pay special attention to any potential liabilities for sales, use and payroll taxes. While a well advised purchaser is likely to discover any such liabilities even without disclosure by the seller, the timing of the discovery might cause the purchaser to place a substantial portion of the purchase price into escrow and could delay the closing of the transaction. A seller that takes the initiative and eliminates these exposures increases its control of the sale.
II. Responsible Person Liability.
Even after the stock or the assets of a business are sold, a state can determine that the business has an unpaid liability for sales, use, payroll or other taxes. These liabilities can be very large. As is discussed above and in Part I, when the states determine that such taxes are owed, the states may look to the purchaser for payment of the taxes.
The states also may look to the “responsible persons” of the sold business for payment of the taxes. And, because a state can choose to impose the entire liability on a single responsible individual, each director, officer, partner and employee involved in the sold business’s decision making or tax reporting functions must ensure that the business’s taxes have been paid in full.
Cases involving responsible person liability are reported regularly. Just last month, New York State issued two decisions imposing responsible person liability. In one decision, an individual was held responsible for almost $450,000 of his business’s unpaid sales taxes, interest and penalties; in the other decision, a 50% shareholder was held liable for 100% of his corporation’s unpaid wage withholding taxes. This topic is discussed in additional detail in State Tax Alert, volume I, issue 3
III. Income Taxes.
State income tax liabilities can be greatly affected by whether the sale is one in a series of such sales made by a seller, whether the sale is of stock or of assets, and whether the seller distributes the sales proceeds to its owners. A detailed explanation of the importance of these factors is beyond the scope of this Alert. However, the principles involve the determination of the amount of a business’s taxable income and the division of that income among taxing states. In addition, the sale of a business almost always presents the possibility that the states will tax more than 100% of the gain on the sale (that is, some of the gain will be taxed twice) or that less than 100% of the gain will be taxed (that is, some of the income will escape taxation). Please see State Tax Alert volume I, issue 4 for a more detailed presentation of these income tax issues. For these income tax reasons alone, sellers of businesses must engage in pre-sale state tax planning.
IV. Real Property Transfer Taxes.
If the sold business owns or leases real property, the seller should determine prior to the sale whether the transaction will be subject to real property transfer taxes. In certain circumstances, it may be possible to avoid the imposition of these taxes by selling the business’s stock instead of its assets. Real property transfer taxes are discussed in State Tax Alert, volume I, issue 5
This Alert highlights some of the state tax considerations when purchasing another business’s assets or stock. For further information and assistance with state and local tax issues anywhere in the United States, please contact David A. Fruchtman at 04-629-0520 or at (312) 281-1111.