Sales tax rules can be confusing, because states often take different approaches to the same tax concept. In most cases, sales tax obligations apply at the level of each separate legal entity—even if that entity is disregarded for federal or state income tax purposes. Although this rule generally applies in most states, variations in state laws create uncertainty and complicate compliance. In at least five states—Alabama, Missouri, South Carolina, Tennessee, and Wisconsin—an entity disregarded for income tax purposes may be disregarded for sales tax purposes as well. Below are the relevant statutes and guidance in each state.
Alabama
Alabama Code Section 10A-5A-1.07(b) states that “[n]otwithstanding subsection (a), for purposes of taxation, other than Chapter 14A of Title 40, a limited liability company or foreign limited liability company shall be treated as a partnership unless it is classified otherwise for federal income tax purposes, in which case it shall be classified in the same manner as it is for federal income tax purposes” [emphasis added].
An Alabama Administrative Law Division decision indicates that the state has long considered an entity disregarded for federal income tax purposes to be disregarded for sales tax purposes, too.1 In this case, the administrative law judge confirmed that the state follows federal entity classification rules regarding single-member limited liability companies (SMLLCs) for all taxes levied by the state, the exception being the state’s business privilege tax. Accordingly, the SMLLC was disregarded for purposes of Alabama’s business license tax, and the court ruled that the tax is levied upon the owner of the disregarded entity.
Missouri
Missouri limited liability company statutes state that “[s]olely for the purposes of chapter 143, chapter 144, and chapter 288, a limited liability company and its members shall be classified and treated on a basis consistent with the limited liability company’s classification for federal income tax purposes.”2 Chapter 144 is the tax chapter that governs sales and use taxes. The Missouri Department of Revenue has applied this statute so as to disregard entities for sales and use tax purposes when the entities are also disregarded for federal income tax purposes.3
South Carolina
South Carolina Code Section 12-2-25(B)(1) provides that “[f]or South Carolina tax purposes . . . a single-member limited liability company, which is not taxed for South Carolina income tax purposes as a corporation, is not regarded as an entity separate from its owner.” A South Carolina Supreme Court case supports the state’s interpretation of this statute as applicable to all South Carolina taxes, including sales and use taxes.4
Tennessee
Tennessee Code Annotated Section 48-211-101 states that “[f]or purposes of all state and local Tennessee taxes, a foreign or domestic LLC shall be treated as a partnership or an association taxable as a corporation as such classification is determined for federal income tax purposes.” The Tennessee Department of Revenue, in Letter Ruling 23-08 (August 24, 2023), explains its position that the statute shows the legislature’s intent to classify limited liability companies for Tennessee state and local tax purposes in the same manner that they are classified for federal income tax purposes. Accordingly, if an entity is disregarded for federal income tax purposes, Tennessee law would treat the entity as disregarded for state and local tax purposes, including sales taxes, as well.
Wisconsin
Wisconsin Statute Section 77.61(19m)(a) provides that “[a] single-owner entity that is disregarded as a separate entity under Chapter 71 is disregarded as a separate entity for purposes of this subchapter.” This code section falls under Subchapter III, General Sales and Use Tax, and thus treats single-owner entities disregarded under Chapter 71 (Income and Franchise Taxes for State and Local Tax Revenues) as disregarded for sales and use tax purposes.5
Knowledge of State Exceptions Essential
Lack of knowledge of the states in which a business may be disregarded for sales tax purposes (and treated as a division of its owner) can complicate a variety of situations.6 In this section, we consider two examples.
Example 1
Tax due diligence is being conducted on the potential sale of ABC Retail, a SMLLC disregarded for federal income tax purposes and wholly owned by ABC Retailer Parent. During due diligence, Buyer finds that ABC Retail exceeded economic nexus thresholds in a number of states. In one of those states, Tennessee, ABC Retail is determined to have a sales tax registration and collection obligation as of January 2021 but has never registered to collect sales tax in the state. Based on ABC Retail’s sales into Tennessee since the beginning of 2021, Buyer estimates that ABC Retail should have collected $250,000 in sales tax in Tennessee.
Unaware that Tennessee may treat ABC Retail as a disregarded division for sales and use tax purposes, ABC Retailer Parent reviews Buyer’s estimates of sales tax exposure and ultimately agrees that tax should have been collected. ABC Retailer Parent then negotiates with Buyer to reduce the purchase price on the sale of ABC Retail to account for the exposures in Tennessee and a few other states in exchange for removal of indemnity language with respect to those exposures.
A year after the sale, the Tennessee Department of Revenue issues ABC Retailer Parent a sales and use tax audit notice. During the audit, ABC Retailer Parent argues that it has no liability for uncollected sales tax on sales made by ABC Retail in the state. It further argues that ABC Retail (now owned by Buyer) is the correct party to audit for sales made by ABC Retail during the audit period.
The state informs ABC Retailer Parent that Tennessee Code Annotated Section 48-249-1003 provides that for state and local tax purposes, a domestic or foreign LLC shall be disregarded if it is treated as such for federal income tax purposes. (See also Tennessee Code Annotated Section 48-211-101.) Accordingly, during the audit period, ABC Retail was considered a division of ABC Retailer Parent, and Tennessee-sourced sales of ABC Retail would be treated as the Tennessee sales of its owner (ABC Retailer Parent).
The state also cites Tennessee Code Annotated Section 67-6-513(a), which provides that “[i]f any dealer liable for any tax, interest or penalty levied hereunder shall sell out such dealer’s business or stock of goods, or shall quit the business, he shall make a final return and payment within fifteen days after the date of selling or quitting the business” [emphasis added].
The state takes the position that ABC Retailer Parent has sold a division of the company but has not sold out the company’s business or stock of goods and has not quit business in Tennessee. The state points out that ABC Retailer Parent still conducts business in Tennessee through other SMLLCs/divisions after this particular transaction. As a result, the state attempts to hold ABC Retailer Parent liable for the pre-transaction tax liabilities.
Example 2
Consider the same facts as above, but a year earlier than the issuance of the audit notice (and thus shortly after the sale). Buyer, the new owner of ABC Retail, is now working to bring its new acquisition into compliance with sales and use tax obligations. In the year before ABC Retailer Parent received the sales and use tax audit notice from Tennessee, Buyer decided to have ABC Retail enter into voluntary disclosure agreements (VDAs) in certain states, including Tennessee, to address historical sales and use tax noncompliance.
The VDAs are completed roughly six months after Buyer’s acquisition of ABC Retail, with Buyer paying hundreds of thousands of dollars in tax and interest for the lookback periods.
A little more than six months later, Buyer receives a call from the owners of ABC Retailer Parent. They inform Buyer that they’ve been audited for sales and use tax in Tennessee. They further inform Buyer that liability for Tennessee sales and use tax when ABC Retailer Parent still owned ABC Retail may remain with ABC Retailer Parent. If this turns out to be the case, they want to discuss recourse under the purchase agreement in light of the audit.
Having recently completed VDAs in Tennessee and other states for ABC Retail, Buyer is concerned that it may have remitted tax for historical liabilities of ABC Retail that remained with the former owners. In addition, Buyer spent significant time and money to complete the VDA process.
Although opportunities for resolution may exist within the terms of the transaction that govern the allocation of liabilities, these examples highlight potential complications in states with these disregarded entity rules. Although this article does not include examples for all five relevant states, we would note that the successor liability statute may not necessarily apply to the facts. Consider South Carolina Code Annotated 12-54-124, which includes the following language:
In the case of the transfer of a majority of the assets of a business, other than cash, whether through sale, gift, devise, inheritance, liquidation, distribution, merger, consolidation, corporate reorganization, lease or otherwise, any tax generated by the business which was due on or before the date of any part of the transfer constitutes a lien against the assets in the hands of a purchaser, or any other transferee, until the taxes are paid. Whether a majority of the assets have been transferred is determined by the fair market value of the assets transferred, and not by the number of assets transferred. [emphasis added]
A potential complication may arise where an entity owns multiple SMLLCs disregarded for sales tax purposes in South Carolina, since the sale of a single entity may not result in a transfer of the majority of the assets of the business sufficient to trigger successor liability.
Challenges Go Beyond M&As
These are just two examples of how knowledge of disregarded entity rules for sales and use tax (and all tax types) is critical. Two other examples outside of mergers and acquisitions are as follows:
- Qualifying for sales tax exemptions can pose additional challenges in these states. Tennessee has issued a ruling with respect to qualification for exemptions on purchases of industrial machinery and equipment. (See Tennessee Department of Revenue, Letter Ruling 23-08, August 24, 2023.) In this ruling, the department notes that “the sales and use tax industrial machinery exemption is granted to entities whose principal business is the fabrication or processing of tangible personal property for resale and consumption off the premises” (Tennessee Code Annotated Section 67-6-102(46)(A)(i)). An activity is a taxpayer’s “principal business” if more than fifty percent of its revenues at a given location derive from fabricating or processing tangible personal property for resale; this is known as the “51% test.”7 The department notes in the ruling that a disregarded entity purchaser of industrial machinery would be treated as a division of its parent and the 51% test would then apply to the parent entity, potentially disqualifying the business from eligibility for the exemption.
- Businesses can also run into issues during state and local sales and use tax audits when accepting exemption certificates. A strict state auditor could determine that exemption certificates issued to an entity disregarded for sales and use tax purposes are invalid and require that new certificates be obtained in the name of the parent (regarded) entity.
Navigating sales and use tax laws and regulations across the United States is already a daunting task for businesses without their having to worry about disregarded entity rules. However, this is an important issue to keep in mind as you determine tax compliance in these states.
Josh Howell is managing director of state and local tax, and Lance Jacobs is managing director of the Washington national tax office, both at Forvis Mazars.
Endnotes
- First Amer. Holding, LLC v. Dep’t of Revenue, Dkt. No. Misc. 07-773 (Admin. Law Div. 12/20/2007).
- Section 347.187.2, RSMo.
- Mo. Dept. of Rev., Priv. Ltr. Rul. No. LR 7410 (August 29, 2014).
- CFRE, LLC v. Greenville County Assessor, 395 S.C. 67, 716 S.E.2d 877 (S.C. Sp. Ct. 2011).
- See also Wisconsin Department of Revenue, Disregarded Entities (Sales and Use and Withholding Taxes), www.revenue.wi.gov/Pages/FAQS/ise-disregent.aspx#disregent1 (last accessed November 23, 2025). Question 1: Is a single-owner entity that is disregarded as a separate entity for Wisconsin income and franchise tax purposes under Chapter 71 of the Wisconsin Statutes (“disregarded entity”) also disregarded for Wisconsin sales and use tax purposes?
- Although this article highlights these five states, it is not intended as an exclusive list at the state or local level, nor is it intended to address the application of these laws to other tax types.
- Tenn. Farmer’s Coop. v. State ex rel. Jackson, 736 S.W.2d 87, 91-92 (Tenn. 1987); see also Beare Co. v. Tenn. Dep’t of Rev., 858 S.W.2d 906, 908 (Tenn. 1993).
