Failure to get the tax clearance certificate can result in the buyer getting a hit to the wallet years later.

Under most state tax laws, in the sale of a business’ assets, the buyer must obtain tax clearance certificates from the state taxing authorities for taxing jurisdictions in which the seller does business (e.g., makes sales, has customers, offices, property, sales people, etc.). Otherwise, the past tax liabilities that the seller could owe to such taxing jurisdiction may transfer to the buyer.

These tax bulk sales laws require the buyer, seller or both to file a notice with the taxing agency in order to get a tax clearance certificate and avoid the transfer of the past tax liabilities to the buyer. Taxes involved could include sales/use taxes, income taxes, payroll taxes, unemployment taxes, etc. Depending on the state, a tax bulk sale notice is required when there is a sale of a business or all of the businesses assets, or the majority of the assets, or the majority of a class of assets, or a substantial amount of the assets, or in some states any sale of assets outside the ordinary course of business. Failure to get the tax clearance certificate can result in the buyer getting a hit to the wallet years later if the seller owes back taxes and the taxing jurisdiction can’t collect from the seller.

One such rude awakening happened recently in California to Universal Print Company. In 2013, Mr. G’s restaurant sold all of its assets to Universal. Mr. G’s told Universal it had no tax debts. No California tax bulk sales notice was filed with the California taxing authority for a sales tax clearance for past sales taxes that may have been owed. Mr. G’s, however, owed back sales taxes to California. Since no tax bulk sales notice was filed, the California taxing authority issued a sales tax assessment to Universal for the back taxes as a successor in the asset sale. In a decision issued August 2, 2019, the Office of Tax Appeals concluded that Universal owed the back taxes since it did not get a tax clearance. While Universal argued it was misled or defrauded by Mr. G’s, it was determined that Universal did not follow the required statutory tax bulk sales clearance procedure.

This case is a reminder for anyone buying the assets of companies to make sure that the required tax bulk sale notices are filed to avoid a similar situation.

For More Information

If you would like more information on how this may affect your company, please contact Stanley R. Kaminski, any of the attorneys in our State and Local Tax Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.