Protecting the Purchaser’s Interests
A company that purchases the assets of another company does not expect to acquire the existing tax or creditor obligations of its seller. In fact, the asset purchase transaction is designed to avoid the transfer of obligations that is a recognized feature in a purchase of company stock. State governments, however, have developed laws designed to assess derivative liability on purchasers of business assets where the seller is delinquent in certain state taxes at the time of the sale. This article is designed to identify the circumstances under which state law will impose successor tax liability on a purchaser of business assets and provide some instruction on how to successfully avoid the imposition of such liability.
Obligation of a Successor
Any purchaser of all or substantially all of a business or stock of goods of a business is liable for the seller’s tax liability. The purchaser is required to withhold and remit to the state a sufficient amount of the purchase money to pay the seller’s tax liability upon the purchase. The purchaser is relieved of such liability by receiving from the seller a receipt from the director of the department of revenue showing that the taxes have been paid. If the seller fails to provide the receipt or certificate from the department of revenue, stating that no tax is due, the purchaser will be liable personally for any tax, penalties, and interest due at the time of the sale.
The purpose of the successor liability laws is to secure the collection of taxes by imposing derivative liability on purchasers of a business who are generally in a better financial position to collect or pay taxes from the sales·price than the seller who is quitting the business. The clear intention of the state laws in this regard is that the tax debt will follow the business, its assets, or any portion of them.
Because the successor liability statutes have a public purpose, courts in most states have given the statutes a broad interpretation in order to effectuate that purpose.
Summary of Lessons Learned
In almost every instance, the purchaser failed to follow the clear instructions of the state statute by obtaining the tax clearance certificate or withholding funds sufficient to discharge any tax liability due at the time of the closing. Compliance within the context of an approaching closing may often be difficult, if not impossible, given the shifting time frames involved in a closing and the unforeseen events that delay and alter the transaction. With these contingencies in mind, counsel for the purchaser should never close without a tax clearance certificate in hand or an estimated amount of funds sufficient to discharge at least the potential sales tax liability in the bank. Following this rule will allow the purchaser some certainty as to the actual cost of the acquisition. Failure to follow the terms of the statute may result in costly litigation and business disruption from unanticipated state tax claims.