Thinking of selling your ecommerce business? - We need to talk about sales tax liability

Picture this: You’ve spent years and thousands of hours building your online business and it’s time to cash it all in. You received an offer from a buyer too good to turn down and you can already picture yourself sitting on a beach with a nice cold beer before you start your next venture. However, your buyer is asking you about sales tax liability. The sale can’t go through until this is resolved.

The importance of knowing your sales tax nexus 

As the seller, you must be able to give your buyer a thorough look into your detailed sales figures and bookkeeping to show which states your business has: 

- physical nexus

- economic nexus

- click-through nexus

You will also need to be able to show 

- all your sales and use tax returns 

- the date you first reached nexus

- and sales tax remitted from that date.

 If you reached nexus in a state and didn’t register or failed to register on the correct date - you may have outstanding sales tax liabilities. This can cause major issues and delays with the sale of your business.

The two major reasons for sales tax liability

1. Failure to file and remit collected sales tax

If you are behind on your sales tax returns, you must file all outstanding returns and pay back all sales tax before the sale of your company goes through. Late filing can lead to penalties of up to 20% of the tax due and additional late filing fees.

2. Failure to register to a state you have nexus in and not collecting tax

For example, you have an online business that uses a fulfillment center in Massachusetts, however,  you failed to register to collect tax and didn’t collect sales tax on any of your sales. In the last 2 years, you made $25,000 in sales to Massachusetts. Massachusetts has a sales tax rate of 6.25% so you failed to collect and remit $1562.50 in sales tax. This is now a liability and will need to be resolved. You can either register to remit the tax or have to come to an agreement with the buyer that negatively affects your business valuation. 

Does Sales tax Liability transfer to the new owners?

Sales tax liability follows the business activities, not the owner or the LLC itself. How it transfers to the new owners depends on how they acquire the business. If they buy the store as a digital asset from your LLC/Corporation, the sales tax liability will transfer to their company. If they purchase controlling interest in your LLC/Corporation, the sales tax liability will stay with the LLC/Corporation.

What to do if you have purchased an online store?

If you have just bought a store and everything was in good order with sales tax, you need to keep that store sales tax compliant.  We recommend that you also have a full nexus assessment of the business you are purchasing. Economic nexus may not reset with transferring ownership. You can then register for new sales tax permits and be compliant from the get-go.

Summary

Selling or buying an online business can be prosperous for both parties, but you must have a trusted legal team in place to facilitate the sale. Make sure all sales tax liabilities are resolved before the sale goes through and be as transparent as possible with your potential buyers. Attempting to cover anything up could lead to drastic legal action down the road. If you are just starting your business, but are open to the idea of selling it in the future, make sure you are registered to collect and remit sales tax in the correct states. RJM offers a FREE nexus and sales tax liability assessment. Please send an email or contact us for more information.