There are many concerns businesses have when engaging in mergers or acquisitions, but state and local tax is not always one of them. Although often used interchangeably, a merger occurs when two separate entities combine to establish a new entity while an acquisition occurs when one entity takes over another. From a sales tax perspective, the difference may be of consequence. In particular, when one business is sold to another, the decision whether to proceed with a stock or asset sale can make the difference between no tax liability and a large one. This is only one concern, however, when it comes to pre-transaction sales and use tax issues in mergers and acquisitions. In addition to the type of sale, nexus, the taxability of goods and services, old liabilities, and documentation are all problem areas for sales tax practitioners advising clients on a merger or acquisition. This multiple-part article will provide a broad overview of these top sales tax issues for M&A transactions, along with some tips for post-transaction resolutions to unresolved sales tax problems.
Stock Sale vs. Asset Sale
Typically, a business is sold either through a stock sale (sometimes also referred to as an “equity sale”) or an asset sale. When a stock or equity sale occurs, the transfer is of an intangible interest. Broadly speaking, sales and use taxes are imposed on tangible products or services. Therefore, the sale of an intangible interest, such as stock or equity, would generally not be subject to sales or use tax.
However, sometimes an M&A transaction will utilize what is called an asset sale. An asset sale is when the business’s assets, such as inventory, are purchased. In an asset sale, there is almost always a transfer of tangible personal property. As tangible personal property is subject to sales tax, these transactions are generally taxable.
Asset sales may include a variety of items: tangible, real property, as well as intangibles such as intellectual property. From a state and local tax perspective, the sale price of each likely should be appropriately distinguished. When all three are sold as a lump sum, the Department of Revenue may impose sales tax on the full transaction price as the sale of tangible personal property. Alternatively, the local taxing authority may impose property tax on the full transaction when real property was included in the sale. Finally, oddball taxes, such as documentary stamp tax, may also be imposed on the full purchase price when real property is included in a lump sum.
Occasional or Isolated Sale
However, there are more things to consider when engaging in an asset sale and deciding how it should be structured. When the entire entity is sold through an asset sale, the transaction may be exempt from sales tax. In many states, including Florida, there are occasional and isolated sales exemptions.
For example, in Florida, section 212.05, Fla. Stat., provides:
It is hereby declared to be the legislative intent that every person is exercising a taxable privilege who engages in the business of selling tangible personal property at retail in this state, including the business of making or facilitating remote sales; who rents or furnishes any of the things or services taxable under this chapter; or who stores for use or consumption in this state any item or article of tangible personal property as defined herein and who leases or rents such property within the state.
That is quite a list of taxable transactions! However, for purposes of the occasional and isolated sales tax exemption, the key word is “business.” You may think this word does not require a definition, however, Florida statutes does provide one. Section 212.02, Fla. Stat., defines “business” as
any activity engaged in by any person, or caused to be engaged in by him or her, with the object of private or public gain, benefit, or advantage, either direct or indirect. Except for the sales of any aircraft, boat, mobile home, or motor vehicle, the term “business” shall not be construed in this chapter to include occasional or isolated sales or transactions involving tangible personal property or services by a person who does not hold himself or herself out as engaged in business or sales of unclaimed tangible personal property under s. 717.122, but includes other charges for the sale or rental of tangible personal property, sales of services taxable under this chapter, sales of or charges of admission, communication services…
Therefore, pursuant to section 212.05, Fla. Stat., an asset sale of tangible personal property would normally be taxable except for the fact that occasional or isolated sales are excluded from the definition of “business.” As one must be in the “business of selling tangible personal property,” a one-time sale such as a merger or acquisition would not subject the seller or purchaser to the requirement to register with the Department of Revenue to collect and remit sales tax on the transactions.
But what exactly qualifies as an occasional or isolated sale? While Florida statutes do not go into great detail on the nature of an occasional or isolated sale, the Florida Administrative Code provides further insight in Rule 12A-1.037 Occasional or Isolated Sales or Transactions Involving Tangible Personal Property or Services. The very first paragraph of this rule identifies all the factors evaluated to determine whether a sale, or series of sales, qualifies as an occasional or isolated sale. Specifically, Rule 12A-1.037(1), Fla. Admin. Code, identifies:
(1) the intent of the parties;
(2) The frequency and duration of the sales;
(3) the type of tangible personal property or services offered for sale;
(4) the location where the sales take place; and
(5) the status of the parties, as it relates to the tangible personal property or taxable services being sold
Under these factors, a merger or acquisition should qualify as an occasional or isolated sale. However, Rule 12A-1.037, Fla. Admin. Code, also specifically addresses these types of transactions in a variety of forms:
Tangible Personal Property exchanged for Stock or Interest
Rule 12A-1.037(2)(b)(1), Fla. Admin Code, exempts the transfer of tangible personal property to or by an entity when the tangible personal property is in exchange for the stock or an interest therein, or in an entity which controls such entity, in proportion to the value of the property contributed.
The Rule provides several examples of the types of transactions that are exempt:
X Corp and Y Corp each transfer $500,000 worth of tangible personal property to form XY Corp in exchange for X Corp and Y Corp each owning 50 percent of XY Corp stock. That transfer of tangible personal property to XY Corp is exempt as an isolated sale.
X Corp transfers all or substantially all of the tangible personal property of one of its divisions to Y Corp, a newly formed corporation, in exchange for all of the stock of Y Corp. The transfer of the tangible personal property is a contribution to the capital of Y Corp and therefore is an exempt isolated sale.
Z transfers tangible personal property to Y Corp as a contribution to the capital of Y Corp and either increases the value of its presently held stock in Y Corp in proportion to the value of the property contributed or receives additional stock in proportion to the value of the property contributed. The transfer of the tangible personal property from Z to Y Corp is a contribution to capital and therefore is an exempt isolated sale.
Transfer of Property Pursuant to Consolidation or Merger
Rule 12A-1.037(2)(b)(2.), Fla Admin. Code, exempts as an occasional or isolated sale the transfer of property to an acquiring corporation pursuant to a consolidation or merger of the corporation and in exchange solely for issuance of the acquiring corporation’s stock, or stock of the acquiring corporation’s parent. The Rule provides another example in this section for these specific types of transactions:
X Corp merges into Y Corp, in compliance with the statutory merger requirements set forth in Chapters 607 and 617, F.S. X Corp would not be required to collect sales tax from Y Corp on the transfer of the tangible personal property to Y Corp, since such transfer is not in the normal course of business; instead, the transfer is for the merger or consolidation of X Corp and Y Corp in the formation of XY Corp.
Rule 12A-1.037(2)(b)(2.), Fla. Admin. Code provides other examples of occasional or isolated sales which cover other types of stock or asset sales.
Conclusion
For purposes of sales and use tax, mergers and acquisitions should be evaluated carefully pre-transaction. The decision of whether to engage in a stock or asset sale can have serious sales tax consequences. This multi-part article will continue to explore both pre and post-transaction sales and use tax concerns for practitioners engaging in M&A transactions.
Jeanette Moffa is a partner in the Fort Lauderdale office of Moffa, Sutton, & Donnini, P.A. She focuses her practice in Florida state and local tax, with an emphasis on sales and use tax. Jeanette provides SALT planning and consulting as part of her practice, addressing issues such as nexus and taxability, including exemptions, inclusions, and exclusions of transactions from the tax base. In addition, she handles tax controversy, working with state and local agencies in resolution of assessment and refund cases. You can learn more about Jeanette HERE.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners from the entire state of Florida. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
AUTHORITY
Section 212.02, Fla. Stat. Definitions
Section 212.05, Fla. Stat. Sales, Storage, Use Tax
Rule 12A-1.037, Florida Administrative Code Occasional or Isolated Sales or Transactions Involving Tangible Personal Property or Services
ADDITIONAL RESOURCES
Florida Sales Tax Mergers & Acquisitions Part 2, by Jeanette Moffa, Esq., Published July 9, 2023
FL Sales Tax: How To Settle with the Tax Man - Part 1, by James McAuley, Esq., Published November 1, 2020
FL Sales Tax: How to Settle With the Tax Man – Part II, by James McAuley, Esq., Published December 11, 2020