When buying a business, excitement and stress usually take center stage. Between due diligence, legal paperwork, and negotiations, it’s easy to overlook one crucial factor: Sales tax in Asset Purchases.
Many assume that asset deals are cleaner and less risky than buying a company outright.
After all, you’re just buying selected equipment, inventory, or maybe intellectual property, not the whole business, “warts and all.”
But what many don’t realize is that sales tax in asset purchases can sneak in and cause big headaches for both buyers and sellers.
What Is an Asset Purchase?
In an asset purchase, a buyer acquires specific business assets rather than taking over the legal entity itself. This could include everything from computers and office furniture to inventory, machinery, or customer lists.
The key point? Sales tax may apply, depending on what’s being bought and which state you’re in.
Are You on the Hook for Sales Tax?
That depends on what’s included in the deal. Here’s a general rule of thumb:
- Tangible items (like desks, printers, or vehicles) are usually taxable.
- Intangible assets (like goodwill, patents, or trademarks) are usually not.
But every state plays by its own rules. Some allow exemptions, others don’t.
Many states, for example, have an “occasional sale” exemption. If the business isn’t in the habit of selling assets, the one-time sale may not be taxed.
It’s like how you wouldn’t get taxed for selling your old couch on Facebook Marketplace.
However, a few states don’t offer this occasional sale loophole. New York, Oklahoma, Colorado, and Wyoming are among them.
So if you’re buying business assets in one of these states, expect to deal with sales tax unless a specific exemption applies.
In New York, for example, even though there’s no occasional sale exemption, there are carve-outs.
Machinery used for manufacturing might be exempt. So might inventory that’s being bought for resale. But it’s all very case-specific.
That’s why detailing every asset in the purchase agreement matters. The more transparent the breakdown, the better your chances of avoiding tax surprises.
A Hidden Risk: Successor Liability
Here’s where things get trickier. Let’s say the seller owes sales tax from past years, and you buy their business assets. Think that debt disappears with the old owner? Not necessarily.
Many states, including New York, can hold the buyer liable for the seller’s unpaid sales taxes under what’s called successor liability. This rule exists to prevent sellers from walking away from their obligations scot-free.
To avoid this, the buyer must typically notify the state tax department about the deal before taking possession of any assets or making payment.
In New York, that means filing Form AU-196.10 at least 10 days before the deal closes.
Once the state is notified, they’ll respond within a few days to let you know if there are outstanding tax issues.
If you don’t file that form or ignore the deadlines, you could end up being liable for someone else’s tax bill. And unfortunately, that liability can be huge.
There are cases where buyers were stuck paying hundreds of thousands of dollars because they missed this step, even when the business assets were only worth a fraction of that amount.
Real-World Cautionary Tales
In one New York case, a woman took over her son’s business without much formality, no contracts, no money exchanged, just a transfer of assets like computers and files. The state hit her with nearly $350,000 in back taxes because she failed to notify them and triggered successor liability.
In another case, someone bought a restaurant from his mother and got stuck with $50,000 in liability, simply for not handling the asset transfer properly, even though he claimed he never paid for the business assets.
Understanding Sales Tax in Asset Purchases: The “Escrow Fund” Strategy
To mitigate risk, some buyers skip notifying the state and instead build protection into the purchase contract.
They might include indemnity clauses, where the seller agrees to cover any tax liabilities. In theory, that helps. But it doesn’t protect the buyer from the state, only gives them a path to sue the seller later.
Because of that, many deals include escrow accounts that hold part of the purchase money for a set period. If a tax issue arises, the buyer can dip into the escrow funds to cover the cost.
But this approach isn’t foolproof, it takes time, may involve legal battles, and it’s hard to predict how much to set aside.
Sales Tax in Asset Purchases: The Bottom Line
Sales tax might not be the most exciting part of buying a business, but ignoring it could turn a dream deal into a financial disaster. Here are a few takeaways:
- Review the tax rules in the state where the purchase is happening.
- Clearly itemize assets in the agreement and research applicable exemptions.
- Notify the tax department if required—don’t skip bulk sale forms.
- Consider escrow funds and legal protections in the contract, just in case.
In short: Don’t let tax trip you up. It’s one of those details that may feel minor in the heat of a big business deal, but can come back in a very major way.
Let the buyer beware, indeed.
