In a recently released, nonprecedential decision, the California Office of Tax Appeals (“OTA”) upheld a sales tax assessment of nearly $1 million against an owner/operator of dental practices, finding that the sale of the taxpayer’s dental practices and associated business assets did not fall within the occasional sale exemption from sales tax. Matter of the Appeal of Coast Dental Services, Inc., OTA Case No. 231114667 (Jan. 31, 2025).

The Facts: Coast Dental Services, Inc. (“Coast Dental”) owned and operated dental practices across California. In 2018, Coast Dental decided to cease its California operations and sell its business assets and entered into 25 separate asset purchase agreements with 15 different buyers to do so. Coast Dental had a seller’s permit for its regular business activities (such as selling electronic toothbrushes and other items to patients) but reported the sales of its fixtures and equipment as exempt occasional sales on its sales and use tax return. 

The California Department of Tax and Fee Administration (“CDTFA”) audited Coast Dental and determined the sales of fixtures and equipment “were a series of sales sufficient in number, scope, and character to constitute an activity for which [Coast Dental] was required to hold a seller’s permit.” CDTFA issued a Notice of Determination for tax of $957,275 plus interest, which Coast Dental appealed.

The Law: California imposes sales tax on retail sales of tangible personal property unless a specific exemption applies. The “occasional sale” exemption, found in Revenue and Taxation Code section 6367, generally applies to sales of property not held or used in the course of activities for which a seller’s permit is required, provided the sale is not one of a series of sales sufficient in number, scope, and character to require a permit. Under a CDTFA regulation (Cal. Code Regs., tit. 18, § 1595), if a taxpayer makes more than two sales of substantial amounts (over $400) of tangible personal property in a 12-month period, only the first two sales are exempt and subsequent sales are taxable. 

The Decision: The OTA concluded that Coast Dental’s sales did not qualify as a single exempt occasional sale. While Coast Dental argued that the sales were part of a single, concerted effort to sell its entire business, the OTA found no evidence that the 25 separate contracts were interdependent, contingent, or negotiated as a single integrated transaction. The OTA emphasized that Coast Dental’s intent to sell the entire business was insufficient and that it needed to show that all parties to the contracts shared this intent and that the contracts were structured to achieve a common objective.

While the OTA acknowledged that, in some circumstances, multiple contracts can be treated as a single sale, it found that Coast Dental failed to provide evidence—such as contract terms or negotiation history—demonstrating that the sales were interdependent or part of a single, integrated transaction. As a result, applying CDTFA regulation § 1595, the OTA determined that only the first two sales were exempt and the remaining sales were subject to tax. 

Takeaways: Several key points emerge from the decision:

• Regulatory Overreach? First, the OTA’s decision relied heavily on regulations that arguably go beyond the plain language of the applicable statute. Regulations reflect agencies’ interpretations; they are not the law, and taxpayers should be prepared to challenge regulatory overreach.[1]
• Step Transaction Doctrine. Although not explicitly discussed, Coast Dental appeared to be arguing for application of the step transaction doctrine, which is often used by taxing authorities to treat multiple steps as a single transaction when it benefits the state. Here, the taxpayer sought to apply the doctrine to collapse multiple sales into one transaction, but the OTA required evidence of interdependence and a common objective among all parties—evidence that was lacking in the record.
• Proof Is Key. The OTA’s analysis suggests that with stronger evidence—such as contract provisions tying the sales together, or documentation showing that each sale was contingent on the others—the outcome might have been different. The decision ultimately turned on a failure of proof, not a rejection of Coast Dental’s legal theory.
• Oral Hearing Waiver. Coast Dental waived its right to an oral hearing. In close cases, the opportunity to present arguments and clarify facts in person can be critical to persuading a court.

While the decision did not go the taxpayer’s way this time, it leaves the door open for future taxpayers to succeed where they can provide the necessary evidence. With careful planning and documentation, taxpayers can meet their burden of proof and prevail!