CARE FOR A MERGER? THINK ABOUT SALES TAXES 1ST!
Business owners often elect to consolidate their businesses through some form of a corporate merger. Although there are several essential aspects to consider when planning a business consolidation, one of the most overlooked aspects is the sales tax that applies to the transfer of assets from the dissolving entity. However, with proper planning and foresight, a business owner can often avoid being surprised down the road by sales and use tax liabilities associated with a merger.
Generally, Florida law imposes a 6% sales tax on the sale of tangible personal property. Unfortunately for business owners, when a company dissolves or consolidates through the sale of assets, the sale may be subject to sales and use tax on the full amount of the assets. However, there is a way to avoid sales tax and still accomplish the same end result.
Consider the following alternative… Have you, as a business owner, ever considered a merger in the form of a stock sale? In this scenario, the assets transferred to the surviving company are exempt from taxation as long as consideration is in the form of stock of the dissolving company. Fortunately for the Department of Revenue, many business owners simply are not aware there is no requirement that a merger be structured as a sale of assets.
When looking to whether the property being acquired by the surviving firm is taxable, the determining factor is the structure of the transaction itself. Again, if the business transaction involves a sale of assets, then the business owner of the surviving company owes sales tax on the full amount of the assets acquired. Conversely, if the business transaction involves a sale of stock of the dissolving company, then sales and use tax does not apply. This results from the notion that sales and use tax applies to sales or transfers of tangible personal property for consideration, but not to stock and other intangibles. Here, if the business owner of the surviving entity purchases stock in the company, then this transaction is not a purchase of tangible personal property, but instead an interest in the dissolving company.
Additionally, if two entities each transfer tangible personal property to form a third entity in exchange for both entities owning a percent of the new entity, the transfer of tangible personal property is also exempt as an isolated sale. This has the practical effect of a sales and use tax free reorganization.
However, one type of tangible personal property that should raise flags is inventory. If inventory is being transferred during a merger, the exemptions above will not apply (except in a stock sale). You want to make sure the entity receiving the inventory is registered for sales and use tax BEFORE the merger, so a resale certificate can be given specifically for the inventory. Otherwise, the unintended tax consequences can be harsh.
For business owners whom are aware of these laws before planning and implementing a merger, this is simply semantics. However, the tax on the transfer of assets can have a massive impact on the profitability of a merger. If you, as a business owner, are ever faced with the situation of related businesses needing to move assets from one business to another, do not overlook the possibility of a merger to avoid the sales tax.
About the author: Paula Savchenko is a law clerk in the Fort Lauderdale office of the Law Offices of Moffa, Sutton, & Donnini, P.A. Ms. Savchenko earned a B.S. in Business Administrations from Nova Southeastern University. Ms. Savchenko played soccer for the University, and was given an athletic scholarship. Ms. Savchenko is currently a Juris Doctorate Candidate at Nova Southeastern University School of Law with an expected graduation date of May 2017. Currently, Ms. Savchenko is in the top twenty percent of her class and is the Treasurer of the Jewish Lawyers Student Association at Nova Southeastern University.
AUTHORITY
212.05 F.S. (sets the sales and use tax rate at 6% on tangible personal property in Florida)
12A-1.007(25)(a)(4) F.A.C. (provides an exemption from sales tax for a merger when the sale is of the dissolving companies stock opposed to assets)
12A-1.037(6)(b)(1)(a) F.A.C. (provides an exemption from sales tax for a merger when two business owners form a new entity and transfer tangible personal property to the new entity in exchange for stock)
ADDITIONAL RESOURCES
PLETHORA OF SALES TAX LITIGATION IN FLORIDA, published June 8, 2015, by James Sutton, CPA, Esq.
BURDEN OF PROOF & PERSUASION IN FL TAX CASES, published May 31, 2015, by James McAuley, Esq.
WHEN SALES TAX AUDITORS MAY NOT PICK AND CHOOSE RECORDS TO USE, published April 19, 2015, by Joseph C Moffa, CPA, Esq.
FL SALES TAX – CASH OR ACCRUAL BASIS?, published February 3, 2015, by James Sutton, CPA, Esq.
SHIPPING CHARGES vs FL SALES TAX, published June 8, 2014, by James Sutton, CPA, Esq.