Wyoming Rules That Sale of Business Assets Was Subject to Sales Tax

While most states provide a sales tax exemption for sales of business assets, the specific language of these exemptions differs among jurisdictions, and taxpayers that do not structure their transactions properly may find themselves on the wrong end of a sales tax dispute.

By Jess Johannesen, SALT Manager

When engaged in a transaction to buy/sell a business, the parties and their advisors are often working at a frenetic pace determining how to structure the transaction, how to value the company, conducting due diligence, and preparing the necessary documents to close the transaction.  Among the long list of considerations is whether the sale of the business is subject to sales tax?

When purchasers acquire another business through an equity sale (i.e., where the buyer purchases the actual ownership interests of the business entity), the transaction generally will not be subject to sales tax since sales tax is generally imposed on the sale of tangible personal property.  When purchasers acquire a business through an asset sale in which all or part of the business’ assets are transferred, sales tax may apply to the extent that the assets consist of tangible personal property.  States often provide sales tax exemptions for these types of transactions, which are commonly referred to as occasional, casual or isolated sales.  However, the language and applicability of these types of exemptions are not uniform, the parties should address the specific language in the exemption for the applicable state(s) prior to closing.

A recent Wyoming Supreme Court ruling illustrates the careful attention that must be given to the language in the sales tax exemption.[1]  In this case, Buyer purchased 28 percent of Seller’s tangible and intangible assets from Seller’s HVAC services business, and those assets were valued at $1.15 million.  Buyer did not purchase any of the Seller’s cash, checking and savings accounts, accounts receivable, etc.  which were valued at just over $3 million.

Wyoming provides a sales tax exemption for the sale of a business entity when a purchaser acquires, “all or not less than 80 percent of the value of all the assets which are located in [Wyoming] of the business entity when the purchaser continues to use the tangible personal property in the operation of an ongoing business entity in this state.”[2]

Wyoming determined that the transaction was not exempt from sales tax because Buyer did not purchase at least 80 percent of the total value of Seller’s assets (which included the cash, accounts receivable, etc.).  Buyer argued that the statutory exemption is ambiguous and that the cash and receivables should not be considered when evaluating the 80 percent requirement, stating that, “there is no logical result or reason” to require buyers to purchase cash.  Buyer urged the court to interpret the statutory exemption to require a purchase of at least 80 percent of a seller’s tangible personal property rather than 80 percent of its total Wyoming assets.

The Court noted that Buyer, “may be making a credible policy argument,” but that the Court was not at liberty to add words to the statute.  The Court ultimately ruled that the plain statutory language conditions the exemption on the purchase of at least 80 percent of the value of all of a business entity’s assets located in Wyoming, and that did not happen here.  Accordingly, the Court held that the sale of Seller’s assets was subject to sales tax.

Whether you are selling or purchasing a business, Aprio’s State and Local Tax team regularly works with our Transaction Advisory Services team to assist our clients through the due diligence process.  In addition, we analyze any sales or other transfer tax issues that may arise, including real estate transfer taxes, and in cases where taxes may be applicable, we can recommend potential alternative structures to minimize such taxes.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jess Johannesen, SALT manager, at jess.johannesen@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the Nov./Dec. 2019 SALT Newsletter.

[1] Delcon Partners, LLC v. Wyoming Department of Revenue, No. S-19-0078, 2019 WY 106, 10/21/19.

[2] Wyo. Stat. Ann. §39-15-101(a)(vii)(N).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.