Businesses are bought and sold every day for a variety of reasons. In many instances, a business might call it quits and sell their business because they can’t pay vendors, they get behind on payroll, or they cannot make rent. While there may be obvious reasons an owner is selling their business, state sales tax is often overlooked as a potential lingering liability. More concerning, most buyers and most buyers’ attorneys don’t even ask the question about state sales tax issues that have not been resolved.
Few purchasers and attorneys, except for the rare state sales tax attorneys and professionals are aware of successor liability for sales tax. Most states, however, have provisions that if you buy a company, you are on the hook for the sales tax obligations of the old company. This holds true, in most states, whether you buy the stock or even the assets of the company. That’s right, simply buying the assets of a business can also give you the state sales tax liability!
Way back in 2012, a taxpayer purchased the assets of a restaurant known as the Oak Tree Diner for $50,000. After purchasing the business assets, the new business obtained a sales tax number the new Creekside Diner. Like many business owners, the new owner was excited to get operations going and the new restaurant off the ground. Little did the new restaurant know that they bought more than they bargained for.
It was not until 2015 that the new business owner became aware that they accidentally bought the old business’s unresolved California sales tax liability. Specifically, in 2015, California issued a Notice of Successor liability for over $40,000. Unfortunately, whether the buyer had professional assistance or not, anyone without extensive experience in sales tax does not know about successor or transferee liability. In fact, even the most seasoned state sales tax lawyer or professional does not even know about the concept of successor liability.
Was the Successor Liability Assessment Timely Issued?
States only have a finite time to assess a business for unpaid sales and use tax. In most states, the state agency has 3 to 4 years from the date the sales tax return was filed to make an assessment. Conceptually, a state has notice of the amount of tax paid upon the return being filed, which triggers the running of the clock for them to investigate if there is an issue.
From a successor or transferee liability perspective, statute of limitations issues become a bit murky. In theory, the state should have a specific time from when they receive notice of the event to investigate if there is an issue. Once the state has noticed, it should have its 3 to 4 years to investigate if there is an issue.
California, for example, takes the approach that it has 3 years from the date it receives notice of the sale of the business. Here, the taxpayer claimed that the new business received its sales tax number outside of the 3-year window, which constituted notice. However, likely without the assistance of a California sales tax lawyer or other professionals, the purchaser left blank the section about Ownership and organizational changes. California Department of Tax and Fee Administration (“CDTFA”) did not become aware as to the change in business ownership at the address until a phone call shortly after the purchase, which was within the 3-year window. Therefore, the Office of Tax Appeals (“OTA”) sided with CDFTA on the statute of limitations issue.
Was the Purchaser on the Hook for CA Sales Tax of the Seller Business?
What is really the kicker in most states, including California, the purchaser is on the hook for the sales tax liability for seller up to the purchase price paid for the business. This applies whether or not the purchaser knew about the liability of the seller and even if assets were purchases as opposed to stock. Such a rule is opposite to general business law principles and can catch the non-sales tax lawyer or professional off guard.
The only way to protect the purchaser in most states is some form of obtaining a certificate of compliance from the revenue agency. California is no exception and allows the purchaser to escape the seller’s sales tax liability if they obtain a certificate from CDFTA that no tax is due.
Without a seasoned sales tax pro onboard, the purchaser in the case paid $50,000 for the business assets. Of course, the purchaser did not obtain the get out of jail free card, ie- the sales tax certificate from CDFTA. Resulting, the OTA upheld the assessment.
Takeaways
This case can be a learning opportunity for the business owner and small business owners across the country. Certainly having a competent state sales tax lawyer, consultant, or other professional on their team can be worth their weight in goal, or at least a lot less than accidentally buying someone else’s sales tax liability. If a business is purchased with a sales tax obligation, all the more reason to have a state sales tax pro to fight the issue all the way through tax or administrative court.
At Sales Tax Helper we help those in need of sales tax audits, protests, and administrative litigation. More importantly, we provide services equivalent to tax attorneys at the price of a sales tax consultant. Simply put, this is what we do, and we will work hard to reach a reasonable resolution for your business’s sales tax liabilities. We welcome the opportunity to handle your sales tax issues and be part of your team!