Tax law states that the purchaser of "all or substantially all" the assets of another business is responsible for the seller's tax liability. So you need to factor this in when you are structuring the acquisition. If you don't, you could be in for a costly tax surprise after the deal closes.
While bulk-sale notification rules protect asset-sale purchasers from successor liability for sales tax purposes, the rules are time-consuming and cumbersome. The notification rules are essentially an invitation for the state tax agency to audit the seller and opine on their prior compliance.
Given that each state has its own unique process, a transaction could be delayed by months waiting on the tax-clearance certificate from the state tax agency. Once a clearance certificate has been granted, the state may require the buyer to place sufficient funds in escrow to cover any potential tax liability owed. For these business reasons, it is not uncommon for purchasers to opt out of the notification requirements and rely on the seller's representation that it has complied with all of its sales tax obligations.
Sales and use tax laws are complex, so you may want to work with an experienced adviser to help you navigate what to do if the purchaser opts out of the notification requirements. Keep in mind that a transaction that does not give bulk-sale notification to the state may not be any simpler to complete. The purchaser that does not provide bulk-sale notification often requires the seller to perform a sales and use tax review prior to the acquisition to identify any areas of exposure and minimize successor-liability issues.
The most common types of successor-liability issues that you may encounter relate to failure to collect and remit sales and use tax and incorrect nexus or taxability determinations. Once these issues are identified, the seller can take corrective measures to minimize any potential successor liability for the buyer. The most effective way to reduce sales tax exposure is for the seller to enter into voluntary disclosure agreements with states where it has nexus but is not currently collecting or remitting sales tax. By having the seller enter into VDAs, the purchaser is assured the seller is current with its sales and use tax obligations, thereby minimizing the risk of successor liability.
Additionally, when purchasers waive the notification requirement, they might also require the incorporation of indemnification provisions into the sales contract. These provisions create a private right of action whereby the purchaser can be indemnified by the seller for any unpaid sales and use tax incurred while the business was operated by the seller. Indemnification provisions may involve the escrowing of funds to cover any sales tax successor-liability issues that arise. If funds are not put into escrow, then the purchaser would rely solely on the seller's ability to pay at the time such liabilities are identified. Depending on the seller, this could make the indemnification provisions of little or no value to the purchaser. As a result, it is advisable to place funds in escrow to cover potential sales and use tax liabilities if it is uncertain that all obligations have been satisfied.
Sales tax liability can result in a significant unexpected cost relating to the sale or purchase of a business enterprise if not dealt with upfront. Parties to a sale of a business should be aware of the sales and use tax ramifications of not only the transaction but also successor-liability issues. •
Tarra Curran is a managing director at CBIZ Tofias.