TR 38: Sales and Purchase of Business

An asset sale of a business is subject to sales/use tax for the amount of the sales price allocated to the tangible personal property of the business. The tangible personal property includes, but is not limited to, machinery, equipment, furniture, fixtures, supplies and vehicles. Assets not subject to sales tax include, but are not limited to, goodwill, inventory and accounts receivable. If the sales contract does not allocate the sales price to particular asset groups, then a fair market value allocation or the book value of the assets in the accounting records of the purchaser may be used to calculate the sales tax due.

The new owner of the business, now owning the tangible personal property, is liable for any unpaid sales/use tax on this property. If sales tax is not collected on the sale of the business by the seller of the business, use tax must be paid by the purchaser.

The Boulder Revised Municipal Code excludes the following sales or changes in business from the definition of "Purchase" or "sale", and, therefore, they would not be subject to sales/use tax (section 3-1-1,"Purchase" or "sale", BRC, 1981):

1. Division of partnership assets among partners according to their interests in the partnership;
2. Formation of a corporation by the owners of a business and transfer of their business assets to the corporation in exchange for all the corporation's outstanding stock, except qualifying shares, in proportion to the assets contributed;
3. Transfer of assets of shareholders in the formation or dissolution of professional corporations;
4. Dissolution and pro rata distribution of a corporation's assets to its stockholders;
5. Transfer of a partnership interest;
6. Transfer in a reorganization qualifying under Section 368(a)(1) of the federal internal revenue code, as amended;
7. Formation of a partnership by a transfer of assets to the partnership or transfer to a partnership in exchange for a proportionate interest in the partnership;
8. Repossession of personal property by a chattel mortgage holder or foreclosure by a lien holder;
9. Transfer of assets from a parent corporation to a subsidiary corporation or corporation that are owned at least eighty percent by the parent corporation to a parent corporation or to another subsidiary that is owned a least eighty percent by the parent corporation, which transfer is solely in exchange for stock or securities of the subsidiary corporation
10. Transfer of assets from a subsidiary corporation or corporations that are owned at least eighty percent by the parent corporation to a parent corporation or to another subsidiary that is owned at least eighty percent by the parent corporation, which transfer is solely in exchange for stock or securities of the parent corporation or the subsidiary which received the assets; and
11. Transfer of assets between parent and closely held subsidiary corporations, or between subsidiary corporations closely held by the same parent corporation, or between corporations which are owned by the same shareholders in identical percentage of stock ownership amount, computed on a share-by-share basis, when a tax imposed by this chapter was paid by the transferor corporation at the time it acquired such assets, except to the extent that there is an increase in the fair market value of such assets resulting from the manufacturing fabrication, or physical changing of the assets by the transferor corporation. To such extent, any transfer referred to in this paragraph (11) shall constitute a sale. For the purposes of this paragraph (11), a closely held subsidiary corporation is one in which the parent corporation owns stock possessing at least eighty percent of the total combined voting power of all classes of stock entitled to vote and owns at least eighty percent of the total number of shares of all other classes of stock.

Examples:

1. A Boulder company is sold to another Boulder company for $250,000.00. The sales price allocation is as follows; $100,000.00 for equipment, $50,000.00 inventory, $25,000.00 furniture and fixtures, $25,000.00 account receivables, $50,000.00 goodwill. The selling company must collect sales tax for the amount of the sales price allocated to equipment and furniture and fixtures. The other assets are not subject to sales/use tax. If the selling company does not collect and remit the sales tax, the purchasing company must remit use tax.
2. A California company purchases a Boulder company for $150,000.00. The seller did not collect sales tax, and the sales price was not allocated to asset groups in the sales contract. The purchaser's accounting records show $75,000.00 paid for equipment, $25,000.00 for furniture and fixtures, $20,000 for inventory, $10,000 for accounts receivable and $20,000.00 for good will. The purchasing company must remit use tax on the amount allocated in its accounting records for equipment and furniture and fixtures. The other assets are not subject to sales/use tax.

Last Updated on Wednesday, 11 July 2012 11:11