Welcome to the fifth of my ten-part series that can show you how simple-looking parts of a business deal can come back to haunt you or, in the case of this installment, just cost you a lot of extra money. Thank you for visiting, and please also read my other installments about how to avoid getting into trouble in the first place, instead of how to get out of trouble later. Parts I, II, III and IV discuss letters of intent, due diligence, noncompetition clauses, and automatic renewal clauses, and they can be found elsewhere in this blog. I have published an abbreviated version of this whole series in the January 2014 issue of Nevada Business magazine. Here is the link, but with fair warning – it is so abbreviated that it only has seven pitfalls, and there is much more to beware of than what you will see in that article! http://www.nevadabusiness.com/2014/01/seven-pitfalls-avoid-negotiating-business-contracts/
In a sale of the assets of a business, tangible personal property is generally subject to sales tax even if the deal is for substantially all of the business. There are certain exceptions and exemptions, but don’t just assume they will be applicable. Assume the opposite, especially if the seller has sold any other tangible personal property during the prior 12 months.
When you negotiate the purchase or sale of a business, don’t be silent about who pays the sales tax (which is no small sum at Clark County’s current rate of 8.1%). And don’t assume that the buyer is always the one who must bear this expense just because it works that way at the supermarket.
The two guiding principles here are (1) it can be a matter for negotiation between the buyer and seller as to who will bear this expense (or maybe the parties will share it) and (2) if the contract is silent about who bears the sales tax expense, the seller could get stuck with it because the buyer might have to withhold part of the purchase price and pay it directly to the government to satisfy the sales tax liability. Trying to slip this subject past the seller by being silent about it in the contract, though, is not the way to go. Tax laws are complex, and silence is likely to lead to disputes and possibly litigation if one party tries to spring liability on the other party at the closing, instead of addressing this issue up front in the contract.
Buyers, of course, don’t want to add sales tax to their payment obligations in a deal, but putting this burden on the seller just reduces the price that the seller negotiated hard to get in the first place. So the only way both sides come away happy is if one of those exceptions or exemptions that I mentioned above is available. It can get complicated. But addressing this subject at the early stage of negotiations, when the deal price is still under discussion, is the best way to avoid surprises or heated disputes later on.