Sales/use tax considerations in asset transactions.

• Author: Schaefer, Frank

From a Federal income tax standpoint, an asset purchase may be an attractive way to structure an acquisition or a useful step in a corporate reorganization plan. In most states, the Federal tax benefits of a step-up in the basis of assets purchased and consequent increases in future depreciation deductions are similarly recognized on state income/franchise tax returns (although unforeseen, and relatively minor, increases in alternative or additional state corporate taxes measured by net worth or tangible property may result).

What may be overlooked while Federal and state income tax benefits are being tabulated are the sales and use tax ramifications of an asset purchase, or "bulk sale." In most states, there are compliance procedures for notifying the state of a change in the ownership of a business. In many states any transfer of title to motor vehicles (and/or vessels or aircraft) calls for reregistration of the conveyances as well as an additional payment of sales tax at the time of registration. In some states a bulk sale is considered (or can be considered under certain circumstances) a sale at retail. In those states, that portion of the purchase price allocable to tangible personal property located in the same state may be subject to sales/use tax, barring the applicability of any specific exemptions.

Bulk sale notification

The notification requirements of the various states represent a classic example of the lack of uniformity in state tax administration. Indeed, in some states the term "bulk sale" is not mentioned at all in statute, regulation or administrative pronouncement. Instead, specific procedures are outlined for reporting a "substantial" change in ownership, the transfer of "all or substantially all" of a business's property or the "winding up, dissolution or liquidation" of a business; these procedures may apply in the event of an asset purchase.

In other states, a bulk sale is identified as a special type of transaction requiring specific actions by the seller and/or the purchaser. However, instructions for these actions may range from a single paragraph in the sales/use tax statute to several pages of detailed regulations.

In some states special forms must be completed to report a bulk sale, while other states fail to define a reporting requirement beyond "notification." Similarly, there is no uniformity as to when the required notification must be made. Deadlines can range from 15 days before a sale is completed to...