Sales tax concerns
If you’re looking to take over an existing business, it’s important to prepare for the transaction ahead of time. There are several sales tax issues that can come up both during the purchase of the business and when you start running your new company. Be sure to review the solutions to these common sales tax concerns before buying a new business so you don’t get caught off guard during the process.
Unpaid sales taxes from a previous owner
Before an owner sells you their business, he or she is supposed to be current and compliant with the sales and use taxes. This doesn’t always happen though and it’s possible to buy a business with unpaid tax liabilities. In these cases, you are likely to be held responsible for paying these taxes even though they were incurred by the previous owner. That’s why it’s very important to verify that a business doesn’t have a sales tax liability before you make and deals.
Also keep in mind that you could be held responsible for unknown sales and use tax debts discovered during a state audit. You should carefully examine what types of sales the former owner made and identify any possible nexus issues they may have overlooked. Audits can look back many years into the past and if unpaid taxes are discovered their payment and fines could quickly put a new owner out of business while the former owner walks away.
Researching sales tax liability
State governments make it fairly easy for you to verify whether an existing business owes any sales taxes. Typically, you just need to submit a form to the state government department in charge of taxation. In New York, you file a Notification of Sale Form while in Texas you file a request for a Certificate of No Tax Due.
On these forms, you’ll need to list basic information on the existing business like its name, the name of the current owner, and your contact information. The government officials will check whether the current owner has paid all owed sales taxes and will let you know the results.
Dealing with unpaid sales taxes
If you find out that the previous owner still owes sales taxes, be cautious proceeding with the purchase. The New York government recommends that you don’t go through with the purchase until you get notice that all taxes have been paid. Texas officials say you could go through with the sale but ask that you withhold enough money from the sale price to cover the unpaid taxes. Even if you pay the full sale price there is no guarantee the former owner will pay the tax bill and then it could fall on you as the new owner.
Paying sales taxes on business assets
When you buy a business, you’ll also owe sales taxes on some of the business assets. What you’ll owe sales taxes on depends on your state’s tax laws. For example, in Washington you’d owe sales taxes on the value of machinery, equipment, furniture and office supplies but not on business real estate and inventory.
The previous owner is supposed to collect these sales taxes from you as part of the sale. If the previous owner does not, you are supposed to pay a use tax yourself directly to the government agency in charge of taxation.
Collecting sales taxes for your new business
As part of the purchase process, you’ll need obtain a valid Sales and Use Tax Certificate from your state. Most of the time you won’t be able to just take over the permit of the previous owner even though you’re taking over an existing business. You’ll need to apply for a new one in your own name in order to legally collect sales taxes as the new owner.
While taking over a new business can be an exciting process, you need to take your time and make sure to handle all these sales tax issues properly. This way you’ll be able to start your new business without any looming tax problems.
Lucinda Rowlands has been the general manager at Zip2Tax since 2010. She has extensively researched sales and use tax regulations in order to help small businesses navigate complicated tax rules.