The Vermont State Senate is considering a bill, S.67, that would extend the scope of the Property Transfer Tax to apply to the sale of 50% or more of a corporation or other legal entity that owns real property in Vermont. Currently, the Property Transfer Tax is imposed on transfers of real property (subject to certain exceptions) at a rate of 1.45% for non-residential property. The text and status of the bill can be found here: https://legislature.vermont.gov/bill/status/2020/S.67.
The purpose of this bill is variously stated as a “clarification” and an “update” to current law. This bill is much more than a clarification. The state of the current law has been clear since at least 2004 when the Vermont Department of Taxes issued Ruling 2004-01. That ruling stated that the transfer tax did not apply to the transfer of an LLC membership interest because the real estate owned by the LLC “is considered the asset of the LLC and not of the individual members.”
Ruling 2004-01 went on to state that the ruling was “consistent with 32 V.S.A. § 9618, requiring persons to report stock acquisitions under certain circumstances.” That statute requires that the transfer of a controlling interest (meaning 50% or more) of a corporation be reported to the Commissioner of Taxes if the corporation owns real property valued at $500,000 or more, but it does not provide that the transfer is subject to the Property Transfer Tax. We believe that the Department of Taxes was interested in learning the extent to which ownership of real property was being transferred indirectly via transfers of stock in corporations owning real estate. For whatever reason, this section applied only to corporations, not to other business entities. One would hope that, if this bill progresses, the Legislature would receive testimony from the Department of Taxes as to the data on this subject. It would be interesting to learn how much revenue the Department of Taxes believes is being “lost” in this area, if any. Not all sales of businesses involve “indirect” transfers of real property; other tax considerations often dictate that business sales be structured as direct asset sales rather than as transfers of interests in business entities.
If S.67 passes, the Department of Taxes will need to adopt regulations for its implementation. It seems clear from the bill draft that dealing with the Property Transfer Tax will become a significant new element to any sale of interests in a business entity. In some cases, appraisals may be required to allocate part of the purchase price to real property owned by the entity. The parties will also need to prepare a separate document (other than a deed) for recording such transfers in the land records reflecting the fair market value being allocated to the real property in the transaction.