In the complex world of sales tax, certain transactions stand out for their unique challenges, warranting the keen eye of a sales tax professional. These sales and use tax obligations can often go unnoticed by CPAs, brokers, and others who lack familiarity with how the rules apply to uncommon items and one-off sales. In this blog post, we delve into three distinctive sales situations where the involvement of a seasoned tax professional can make all the difference in mitigating the risk of an audit or assessment.
- The Sale or Purchase of Airplanes, Boats, and Large Motor Vehicles
Airplanes, boats, and other large motor vehicles present unique sales and use tax challenges for a few reasons. First, is the large sales price of these items, which makes the potential sales tax outcome more consequential compared to items you might buy at a grocery store. Failing to consider who is liable for the tax (the seller or buyer) could lead to complicated disputes with multiple parties and state Departments of Revenue.
Second, the mobility of airplanes and boats can make it difficult to know where to pay the sales tax on the transaction. This could be any of the following locations depending on the rules of the state(s) involved:
- The location of the buyer or seller.
- The location of the title transfer.
- The location of the airplane’s primary use or where it will be primarily stored.
For example, California applies the use tax rate based on an aircraft’s principal hangar. The answer to the question of where to pay the owed tax truly depends on the nature of the transaction and the tax rules of the state(s) that could have a right to the tax on the sale.
A third challenge with sales tax for large aircraft and vessel purchases is the potential for mixed commercial and personal use. This can complicate the application of available sales and use tax exemptions. Again, each state has the potential for unique rules on qualifying for available exemptions as a seller or buyer of these types of purchases. Relevant issues in the analysis could include the following:
- The relationship between the buyer and seller.
- Whether the transaction is a permanent or temporary sale (i.e., a lease).
- The nature of the intended and actual use.
- The frequency of the specified uses.
Understanding these issues before finalizing a sale or purchase could be critical in mitigating the potential sales and use tax and for clarifying related deal points.
- A Bulk Sale or Occasional Sale Transaction
Not all sales and purchases happen in the ordinary course of business, which can make it difficult to know the corresponding sales and use tax obligations of these transactions. For example, you might be selling old business equipment, hosting an estate sale, or transferring assets as part of an M&A deal. These unique situations often raise questions about the potential for an exemption under a state’s bulk or occasional sale rules. Depending on the state, you may also hear these referred to as casual or isolated sales.
Because these transactions happen so infrequently and are outside the course of normal operations, the corresponding sales and use tax is often a forgotten subject. It’s important for the parties to these transactions to understand the accompanying tax obligations and ensure proper steps are taken to qualify for possible exemptions. For example, the tax for a bulk sale transaction is generally the obligation of the seller in New York, but the state requires buyers to file forms prior to the sale to avoid extended liability for a seller’s nonpayment of tax. Otherwise, the buyer of the bulk sale could also be on the hook for the corresponding tax.
The issues that could impact the potential for an isolated or bulk sale exemption might include the following:
- The nature of the seller and whether they have a seller’s permit or other registration to collect tax in the state.
- The frequency of the isolated sales within a given period (usually on an annual basis).
- The purchase price.
- The nature of the item being sold or bought.
- Responsible Person Claims
Another unique problem that we sometimes see involves the assessment and potential personal liability as a responsible person for a business’s unpaid sales and use tax. Most states have a responsible person or corporate officer laws that allow tax departments to collect a business’s unpaid tax from the individuals involved in the company. In most cases, responsible persons are owners, shareholders, managers, executives, and other key personnel. Anyone with responsibility for the nonpayment of sales and use tax by a business could face personal liability for the assessment.
It’s possible to challenge any claims against you as a responsible corporate officer depending on the facts of a case and reasons for nonpayment of tax. These cases could involve a dispute with the assessed tax or liability could belong to another responsible person within the company. A common example is that of a passive investor who meets the state’s definition of a responsible person but has little control over the financial and tax decisions of the company.
Meet with a Sales Tax Professional for Help with These Unique Transactions
Consulting with a sales tax professional can be an important step when participating in unique transactions where obligations and liabilities are unclear. A consultation could provide guidance around necessary exemptions, filings, and other important sales and use tax compliance items. If you’ve recently sold an airplane, equipment, or other business assets without consideration for the sales tax, now may be the time to evaluate options with a Voluntary Disclosure or another resolution process before receiving an audit or assessment notice.