Whether it be selling off weight sets to make room for new products or selling large fitness equipment in connection with shutting down or moving a facility, there are a few items to consider to ensure that selling fitness equipment outside of the ordinary course is done properly. To be clear, selling items “outside of the ordinary course” essentially just means that the sale of such equipment is not something that the business regularly engages in as part of its operations; rather this sale is tangential to the business. There are a few reoccurring questions that are often discussed with clients during this process and knowing the answers to these questions from the beginning can help prevent larger, more severe, and most importantly, preventable issues down the road.
1. Is your equipment serving as collateral for a loan?
YOU NEED TO CHECK. If your business has taken out a loan from a bank or other senior lender it may be secured by the all assets of the business, also known as a “blanket lien.” This would include all equipment owned by the business. Similarly, if you have purchased the equipment from a retailer or manufacturer that has provided financing for the equipment, there is likely a lien on such equipment until the financing is paid off. Selling equipment that serves as collateral of a loan without the lender’s express written permission may trigger a default of the loan agreement. This means that even if you have made all payments on the loan, it could potentially become due in full immediately. To avoid this outcome, you should talk to your lender before selling off assets outside of the ordinary course. If selling the equipment is a good move for the business (e.g. the business needs cash or wishes to improve the equipment provided to enhance client satisfaction), the bank/lender is more likely to work with you. If the lender approves the sale of equipment that serves as collateral for the loan, you should first make sure that the approval is set forth in writing and then request that the lender file an amendment to any applicable financing statement. If there is a blanket lien in place (or the lien covers additional equipment), the amendment should specially carve out the equipment being sold. By way of background, a financing statement is the document that a secured lender files with the state that puts others on notice of the liens against the business. You should speak with your attorney to make sure the lender’s agreement to release the collateral is documented property.
2. Do you need to collect sales tax?
NO. From a general standpoint, retailers collect sales tax on items sold in the ordinary course of business and remit such tax to the government. Sales tax rules vary from state to state. In Illinois, sellers owe an occupation tax to the Department of Revenue called a Retailers Occupational Tax (“ROT”) and they pass this cost on to buyers by charging a use tax on purchases (to reimburse themselves for the amount of the ROT). However, one important exception to the ROT is the “Occasional Sales” exception. The Occasional Sales exception states the retailers do not incur a ROT on isolated and occasional sales outside of the ordinary course of their business. This exception applies even if several sales occur in order to dispose of the desired tangible property (i.e. you could sell equipment to many different purchasers and the result would be the same, namely, that you are not subject to an occupation tax on the value of the equipment). The purchasers of such equipment however, are still responsible for paying applicable taxes on the value of the equipment and should list such purchases on their tax returns.
3. Should you have purchasers sign a Waiver?
YES. You are selling equipment that has likely been used and you may be unsure of its condition, issues, etc. It is therefore important to make it clear to purchasers (unless otherwise agreed) that the equipment is being provided “as is” and there are no warranty obligations of seller. The Waiver should also state that the parties agree that the seller is not liable for any damage or injury that results from any use by the purchaser/third party after the date of sale. The Wavier may also include an indemnification clause that requires the purchaser to indemnify seller in the event that seller is sued by a third party for damage incurred after the date of sale. This Waiver can be a relatively short document for your attorney to draft but is essential in protecting the business.
Selling fitness equipment is an activity that all owners will come across at some point in the life cycle of their business. Being aware of the answers to the commonly-asked questions above can help owners to avoid accidental missteps in this process that could have been easily prevented.