“One martini: shaken, not stirred.”
“I’m sorry, sir, we can’t sell alcohol here because the previous owner didn’t pay their sales taxes.”
That’s not the kind of conversation you want to have with your customers, and yet, that’s exactly what can happen when state taxes are ignored, overlooked, or mishandled. In this article, we lay out five state tax issues every buyer, broker, and seller of a restaurant needs to know.
1. Look for Sales Tax Refunds
Should a restaurant really be paying sales tax to its to-go box vendor? Or how about to its disposable utensil or chips and salsa vendors? If you’re a restaurant in Georgia, the answer is likely no; you should not be paying sales taxes to any of these vendors. In order to stop paying sales taxes to your vendors and to instead pocket the money - that’s right, you get to keep it - all you may need to do is provide your vendor with a one-page exemption certificate.
However, not every state interprets or imposes their sales tax laws the same way. A restaurant in California or other states may still be required to pay sales taxes on items such as the ones above to their vendors. The takeaway is this: before selling a restaurant, hire a tax professional to examine the restaurant’s purchases to make sure there aren’t any available refunds. If there are available refunds, your tax professional can file documents on your behalf to recover those taxes paid. Note that refunds are likely limited to three or four years at most from the current date.
2. Determine if the Seller Should Charge the Buyer Sales Tax
If a buyer is purchasing the assets of the restaurant (as opposed to purchasing the legal entity that owns the restaurant), they may be required to charge the buyer sales tax on the sale of the assets, depending on the state. For example, if a partnership sells the assets of a restaurant located in Texas, the partnership will likely not be required to charge the buyer sales tax so long as “the entire operating assets” of a business are sold; however, the same situation for a New York restaurant is likely not true in that the seller will have to charge the buyer New York sales tax.
Because “99% of buyers purchase the assets of restaurants,” according to Steve Josovitz of The Shumacher Group, a veteran broker in the industry, and because sales taxes average 6% to 8% on the sales price of the sale, it is imperative that sellers know when they are required to charge sales tax to the buyer as the sales tax amounts at issue can be substantial and either the buyer or the seller can be held liable by the state. If the buyer is purchasing the legal entity which owns the restaurant, sales taxes are generally not applicable.