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Traps in Transactions — Don’t Take Sales Tax So Casually

01.13.20 | SALT Chat

You’re selling (or buying) that long coveted investment property. Since you are a regular reader of my blog, you have considered all of the income and transfer tax implications and have done everything practicable to minimize your expense. But did you think about sales tax? Probably not.

While I can’t think of one state where the sale of land by itself is subject to sales tax, often a property contains a multitude of other assets, such as improvements, inventory and other tangible personal property. Many of these assets in and of themselves would be subject to the sales tax if purchased in a straightforward retail transaction. Fortunately, many jurisdictions have what is known as a casual or occasional sale exemption. Typically, these exemptions provide that if otherwise taxable property is not sold in the regular course of business, the sales tax will not apply.

However, things aren’t all that straightforward. Every jurisdiction may very well have a unique definition of what qualifies under the exemption. Additionally, some jurisdictions, most notably New York, don’t provide an exemption that is in any way meaningful.

Fortunately, there are still ways to minimize the cost even if sales tax applies. Carefully prepared asset allocations between arms-length buyers and sellers, which separately delineate the taxable and non-taxable assets, will typically be respected. Considering selling an interest in an entity vs. an asset sale can mitigate the tax. Even the type of entity and timing of transaction can have an impact.

Getting the deal done rules the day; tax considerations shouldn’t require rewriting the transaction. Whether you’re a buyer or a seller, you have options that can lead to potential savings. Questions? Please contact us to help you make informed decisions. You can reach me at WBerkowitz@BerdonLLP.com or contact your Berdon advisor.

Wayne Berkowitz, a tax partner and co-leader of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.