An important due diligence practice point for individuals and companies purchasing businesses in Texas, including assets, goodwill, or actual interest in the company is successor liability for state sales taxes.  Almost all states have successor liability statutes that impose certain pre-closing state tax liabilities on the buyer of a business.  The Texas version of this concept is found in Section 111.020 of the Texas Tax Code and reads as follows:

(a) If a person who is liable for the payment of an amount under this title sells the business or the stock of goods of the business or quits the business, the successor to the seller or the seller’s assignee shall withhold an amount of the purchase price sufficient to pay the amount due until the seller provides a receipt from the comptroller showing that the amount has been paid or a certificate stating that no amount is due.

(b) The purchaser of a business or stock of goods who fails to withhold an amount of the purchase price as required by this section is liable for the amount required to be withheld to the extent of the value of the purchase price. . . .

The impact of Section 111.020 is that if a buyer acquires a “business” it can become liable to the State of Texas for up to the full amount it pays for the business (i.e., for a total outlay of double the purchase price, once to the seller and once to the State). The assumption of debt is counted in the total price paid as well as the fair market value of any assets paid in-kind.

The determination of what constitutes a “business” is very fact specific, but the Comptroller’s Rule 3.7 (d) includes the following description:

When determining if a “business” has been or will be sold, the comptroller will examine the transaction to determine what the parties to the transaction intended to buy and sell. The answer in each situation will depend on the type of business involved. A seller may have sold a “business” even when few assets were transferred. Depending on the type of business involved, a “business” may be sold if an owner sells:

(1) a building, land, furniture, fixtures, inventory, and the right to use the seller’s trade name; or

(2) all the capital assets of a business; or

(3) the name and goodwill of a business; or

(4) all the inventory of a business; or

(5) fixed assets and realty necessary to operate a similar business as the seller at the same location.

C. Tax Clearance Certificate Practice in Texas

The buyer of a business can request a tax clearance certificate from the Texas Comptroller of Public Accounts stating (i) the amounts that the seller owes to the State of Texas or if none (ii) releasing the buyer from liability that would otherwise extend under Section 111.020 of the Texas Tax Code. Such requests typically result in a desk audit of the seller’s sales tax, franchise tax, and other applicable state tax filing compliance history.

Importantly, the Texas Comptroller has 90 days to respond to the request. If no clearance letter is issued within 90 days the buyer is generally released from the seller’s state tax liabilities that accrue prior to closing. Note: the certificate is worthless if the parties close prior to the issuance of the clearance letter. In practice, the Texas Comptroller’s office often responds to clearance letter requests inside 30 days.

If you are planning to purchase a business, please contact Bajaria Law Firm, PC, to assist you in ensuring you are not also purchasing excessive sales tax liability.  Alternatively, if the State of Texas is coming after you for successor liability claims, our firm is experienced in defending and resolving these claims on behalf of the taxpayer.