Kentucky Sales Tax Considerations When Selling a Business
Published on by Cheryl Ganim in State Local Tax
- Kentucky businesses may be required to collect sales tax on furniture, fixtures, and equipment (FFE) sold as part of an asset sale when the transaction is a taxable retail sale and no applicable exemption applies.
- Kentucky’s occasional sale exemption generally doesn’t apply to selling activity assets of businesses that are required to hold a seller’s permit.
- How the purchase price is allocated can affect the sales tax treatment of an asset sale, making it important to separately identify real property, inventory, goodwill, intangibles, and taxable tangible personal property.
- Planning for sales and use tax before a transaction is finalized can help buyers and sellers prepare for their respective tax obligations and avoid potential issues down the road.
A Kentucky business requiring a seller’s permit is required to collect sales tax on furniture, fixtures, and equipment (FFE) in an asset sale of the business when the FFE sale is a taxable retail sale and no occasional-sale, resale, or ownership-continuity exemption applies.
Understanding Kentucky’s occasional sale exemption
The occasional sale exemption under KRS 139.010 and KRS 139.470 normally covers isolated sales of personal property that aren’t part of a business requiring a seller’s permit. Under Kentucky law, the “occasional sale” exemption allows businesses that aren’t required to hold a seller’s permit to sell off their non-business assets (like old office furniture) tax-free.
The Kentucky occasional sale exemption never applies to “selling activity assets” of businesses that are required to hold a seller’s permit. The definition of “occasional sales” should be read narrowly per Kentucky case law precedent and the presumed intent of the legislature.
When sales tax applies to business assets
By contrast, businesses that are required to hold a seller’s permit would collect sales tax on the sale of FFE even when they’re selling the entire business, or the buyer must self-assess use tax. For Kentucky sales and use tax, selling business activity assets is treated as a taxable “retail sale” of tangible personal property or digital property.
This rule could affect businesses in Kentucky like retail stores, convenience stores, auto-parts dealers, equipment-rental businesses, short-term lodging operators, motels, hotels, event-space rentals, auctions, barbershops/salons, as well as receivers, trustees in bankruptcy, assignees for creditors, master commissioners, sheriffs, and estate administrators, when they make more than two retail sales in a 12-month period.
Allocating the purchase price
Sellers in a fixed asset sale of a business can avoid over- or underpaying sales tax by considering how the purchase price is allocated.
Consider separately allocating the purchase price among:
- Real property
- Inventory, if any; inventory acquired for resale may be purchased tax-free with proper resale documentation
- Goodwill/going-concern value
- Licenses, contracts, franchise rights, or other intangibles
- FF&E and other taxable tangible personal property using fair, supportable market value (e.g., an appraisal)
Planning ahead for an asset sale
Sales tax may not be the first consideration that comes to mind when you’re buying or selling a business, but how the purchase price is allocated and how individual assets are treated can have important sales and use tax implications. Understanding those considerations before the transaction is finalized can help both buyers and sellers prepare for their respective tax obligations.
Our State and Local Tax team helps businesses navigate complex tax requirements and understand how they may apply to specific transactions. If you have questions about Kentucky sales tax or the tax implications of an upcoming asset sale, we’re here to help. Contact us today for a free consultation with one of our top sales and use tax pros.
Additional resources
Properly handling sales tax and maintaining the right documentation can help businesses avoid issues if an audit arises down the road. Our Sales Tax Audit Survival Guide offers practical guidance for navigating the audit process, including 8 common mistakes companies make during a sales tax audit, while our Sales Tax Audit Preparation Checklist can help businesses get organized and prepare for an audit.
