California Office of Tax Appeals Wouldn’t Bite on an Occasional Sale Exemption Claim From the Sale of Multiple Dental Practices

A company that sold all the dental practices it owned in California in asset sales over five months did not collect any sales tax on those sales, claiming the “occasional sale” exemption applied.

As you might imagine, the price paid by a buyer for an existing dental practice typically consists of non-taxable “intangible” assets, such as patient lists and records, an existing workforce, a favorable location and lease terms, and business “goodwill.” However, it will also involve the sale of some tangible property, such as specialized medical equipment, office and waiting room furniture, and operating supplies. Since sales of tangible personal property are subject to sales and use tax in those states that impose one, unless an exception applies, the seller is required to collect sales tax from the purchaser on the purchase price of the equipment and supplies. If the seller doesn’t collect tax, the purchaser is required to pay “use” tax.

Understanding Occasional and Casual Sales Exemption

California, like most states with a sales and use tax, has an “occasional” or “casual” sales exemption, which applies when the seller is selling taxable property that they are not otherwise in the business of selling. For instance, a law firm might move its offices to a larger or smaller location and decide to sell off the furniture and fixtures at its old location, or a provider of dental services might choose to go out of business and sell its office and medical equipment to a dentist who will use it in their operations. Since the seller is not in the business of selling office or medical equipment, the sales may fall under the state’s occasional or casual sales exemption. However, in California and other states, those exemptions can have limits.

California Revenue & Tax Code section 6367 provides an exemption from its sales tax for “occasional” sales of personal property. Section 6006.5(a) then defines an “occasional sale” as a sale of property that isn’t held and sold by the seller in their normal course of business for which they need a sellers permit (i.e., it’s not inventory) AND the sale is not one of a series of sales sufficient in number, scope, and character to constitute one where they would need a sellers permit. The regulations in section1595(a)(1) provide that “Generally, a person who makes three or more sales for substantial amounts (more than $400) in a period of 12 months” is required to collect sales tax on their sales, as they fall outside of the occasional sale exemption. Where the seller undertakes three or more sales within a 12-month period, the first two sales will be exempt; however, all subsequent sales will not be.

Coast Dental Services Inc. (Coast), which owns dental practices in many states, completely exited the state of California between June and September of 2018, selling off 25 dental practices during that period to 15 buyers in transactions structured as asset sales. Coast generated $11 million in sales from the sales of fixtures and equipment. On its sales tax filing, Coast claimed most of the amount generated from the sales was exempt under the occasional sale exemption. In 2020, the state conducted an audit and denied most of the occasional sale exemption, issuing a bill for $957,275 in sales tax plus interest. Two of the asset sales were permitted to be treated as exempt occasional sales, while 23 other asset sales were deemed subject to tax. While the tax agency agreed that the sales were not made in the ordinary course of business, the number and dollar volume of transactions required the collection and remittance of sales tax under Regulation sec.1595(a)(1).

Coast contended that the 25 separate sales ought to have been treated as a single sale, as they had decided to exit the California marketplace and sell off all their operations in the state. Unfortunately for Coast, their argument was not convincing enough to the Office of Tax Appeals, which found that since 25 sales contracts were negotiated with multiple buyers (15 in total), this sufficiently undercut Coast’s position that all 25 sales ought to be considered as one.

See Coast Dental Services, Inc. OTA Case #231114667, 2025-OTA-439 (1/31/2025), petition for rehearing denied 2025-OTA-440 (5/28/2025).

Takeaway

Exemptions from tax are strictly construed against the taxpayer claiming them. Businesses that sell physical assets that they don’t usually sell may be able to take advantage of a state’s occasional or casual sales exemption, but must ensure that they fit within its confines. If you or your company will be selling a substantial portion of your business’s assets or will be purchasing the business assets of another company, you need to inquire about sales and use tax implications. While most states have an occasional or casual sales exemption, not all do, and of those that do, those exemptions can have limitations, as the taxpayer in Coast found out.

A CBIZ SALT advisor can make you aware of the applicable rules that affect you and the other party to the transaction so that you can plan accordingly.