California Occasional Sale Exemption Did Not Apply to Sale of All Dental Practices

By: Jeff Glickman, SALT Partner

When a business sells its assets, the asset purchase agreement often contains a provision allocating the burden of any “transfer taxes” that may be incurred in connection with such sale.  Two main “transfer taxes” that can arise are real estate transfer tax, on the transfer of any interest in real estate, and sales tax, on the transfer of any tangible personal property (TPP).  It is important to analyze the potential impact of these transfer taxes so that the parties understand the obligations to which they are agreeing under such transfer tax provision.

With regard to sales tax, there are two main asset classes of TPP – inventory and non-inventory.  The sale of inventory is typically going to be exempt from sales tax as a sale for resale.  The sale of non-inventory TPP is often exempt from sales tax pursuant to occasional, casual, or isolated sale exemption rules.  However, the scope and applicability of these rules differ by state, as illustrated by a California Office of Tax Appeals opinion in the context of the sale of a dental practice.[1]

The taxpayer owned and operated many dental practices within California.  During the third quarter of 2018, the taxpayer executed 25 separate asset purchase agreements (the Contracts) with 15 distinct buyers to sell its California-based dental practices and associated business assets.  On its sales tax return for that quarter, the taxpayer claimed a deduction of almost $11 million for the sale of fixed assets (i.e., fixtures and equipment) as exempt occasional sales.  The state disallowed all but about $1 million of that deduction on the basis that only the sales under the first two contracts qualified as exempt occasional sales and that the sales under contracts 3-25 did not qualify for the exemption.

While some state occasional or casual sale exemption rules may apply broadly to all TPP that the taxpayer does not sell in the ordinary course of business, California’s exemption is narrower.  Specifically, an occasional sale includes:

A sale of property not held or used by a seller in the course of activities for which he or she is required to hold a seller’s permit . . . provided that the sale is not one of a series of sales sufficient in number, scope, and character to constitute an activity for which he or she is required to hold a seller’s permit . . . .[2]

Under the regulations, “a person who makes three or more sales for substantial amounts in a period of 12 months is required to hold a seller’s permit regardless of whether the sales are at retail or are for resale.”[3]

The state conceded that the taxpayer’s fixed assets were not held or used in the course of an activity that required a seller’s permit (i.e., the provision of dental services).  However, once the taxpayer engaged in its third sale, it was required to hold a seller’s permit, and any sales under Contracts 3-25 did not qualify for the occasional sale exemption.

The taxpayer argued that all of the sales should qualify as one sale since the intention was to sell all of the dental practices at the same time, and that there was one concerted effort to bring multiple buyers to the table at the same time.  However, given the multiple buyers, it was not feasible to have one contract and one closing.

The opinion explains that there may be instances where multiple contacts among the same parties that are parts of substantially one transaction may be taken together as part of one transaction, even if the contracts are not executed at the same time.  What controls is the parties’ intent ascertained objectively from the contract language, such as provisions that describe the interdependence of the contracts, that the contracts are contingent upon one another, or that the contracts have a purpose of attaining a preconceived objective.  However, the opinion concludes that the taxpayer failed to provide any evidence to support the contention that this was one transaction.

For businesses that are planning to engage in the sale of substantial tangible assets, understanding the relevant state sales tax exemptions is important for two reasons.  First, when negotiating each party’s transfer tax responsibility, it is helpful to understand the potential liability amount (i.e., the amount each party is agreeing to pay).  Second, there may be ways to structure the transaction to minimize these taxes,

[1] In the Matter of the Appeal of Coast Dental Services, Inc., 2025-OTA-439, OTA Case No. 231114667 (Jan. 31, 2025).

[2] Cal. Rev. & Tax Code § 6006.5(a).  There is another type of occasional sale not applicable in this case that arises when all or substantially all TPP is transferred and the ultimate ownership of the TPP is substantially similar before and after the transfer.  Cal. Rev. & Tax Code § 6006.5(b).  It is also worth noting that in most states, these types of exemption typically do not apply to motor vehicles, boats, airplanes, and other similar items.

[3] Cal. Reg. 1595(a)(1).