Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 395.0378


395.0378 Sale of a Service Division. A corporation had two divisions. A service division that performed integrated testing services and whose manager owned 39.7% of the corporation stock, and a systems division that manufactured integrated circuit test equipment and whose manager also owned 39.7% of the corporation's stock. Both divisions were located in the same building and shared the same telephone number. However, they were physically separated from each other by a wall that divided the building. Each division had its own separate address and receiving/shipping docks. The divisions shared the same attorney and the same dental and medical plans and also a sales and accounting staff until about 1985 when each began to use its own personnel. The utilities were billed as one amount with the bill apportioned to each division based on square footage and power consumption. The service division made no sales of tangible personal property. Each division had its own engineering, operations, and technical staff, was operated by a different major shareholder, and had separate supervisory personnel. In July 1986, because of management differences between the managers, all of the assets and liabilities related to the service division plus a proportionate share of some other liabilities of the corporation were transferred to an inactive subsidiary corporation. The service division's manager relinquished his stock in the corporation in exchange for 79.4% of the stock in the subsidiary corporation. The 39.7% of stock in the corporation previously owned by the service division manager was transferred to the systems division manager so that he would hold 79.4% of the corporation's stock. The corporation believed that, if a sale took place, it was an exempt occasional sale.

It is apparent that common ownership was present. The divisions shared a dental and a medical plan and also shared one switchboard. At one time, the divisions shared a common sales staff and accounting staff, but these duties were separated at least a year prior to the sale so that each division had its own sales and accounting personnel. The corporation emphasized the separation of control over the two divisions, the conflict over management of the business, and the way the corporate affairs were conducted. The divisions shared a building but were divided by a wall so that each division had its own address and loading dock. The utilities were shared but the percentage of each entity's payment was based upon the power consumption and the square footage of the building occupied by each division. Although some names appeared on both customer lists, each division had its own customer list. While many activities were shared by the divisions, the actual operations of the businesses appear to have been kept separate.

It is concluded that even though the divisions shared common ownership and other services related to common ownership, the divisions were separate businesses which did not rely upon each other for day to day operations or for future customers. As the service division was not engaged in any activities which would have required it to obtain a seller's permit, it is concluded that the sale of the service division was an exempt occasional sale pursuant to Regulation 1595(a)(3) as contrasted to a business which was operated together as described in Regulation 1595(a)(5)(B)(2). 10/26/90.