For anyone buying or selling a Texas business, dealing with sales and use tax liability can be unexpectedly complex. Imagine you are in the process of purchasing a local restaurant—everything looks great on paper, and you're excited to take ownership. But, during the diligence process, you discover a potential tax issue: unpaid sales and use taxes. Under Texas law, this responsibility can fall on you, the purchaser, and of course on the seller. While liability on the seller may seem obvious, under Texas law, the purchaser may be held liable for prior sales tax liability incurred by prior management.
Many business owners, including the purchaser and the seller, do not anticipate this situation, yet overlooking these details can lead to serious financial consequences, including personal liability. Sellers and buyers must navigate who is liable and how and when that liability attaches to avoid surprise tax bills long after the deal is signed.
This article is intended to explain these issues, addressing the challenges of prior management liability and successor liability in Texas. Further, this blog will explore what it means to be a responsible party, what buyers should know before finalizing a purchase, and how both parties can protect themselves from the risk of double taxation.
For business owners facing these questions, seeking professional guidance is an important step in the right direction. Our tax professionals have the expertise to help you navigate this landscape and protect your business interests.
What is a “Responsible Person?”
Under Texas law, a “responsible individual” includes anyone with control or supervision over collecting, accounting, or paying sales taxes. As outlined in Texas Tax Code § 111.016(b), this individual could be an officer, director, manager, or employee if they hold authority over tax matters within the organization.
In Texas, “responsible persons” can face direct personal liability for a company’s unpaid sales and use taxes. This trust fund tax liability, established by Texas Tax Code § 111.016, parallels the federal tax code’s responsible person provisions under IRC § 6672.
Additionally, “responsible individuals” include managers, directors, or employees of corporations, associations, or LLCs, as well as members of partnerships (Texas Tax Code § 111.016(d)). Anyone in these roles who must oversee tax compliance yet knowingly neglects to remit collected taxes can face personal financial liability.
Sales taxes collected from customers are held in trust for the state. Any sales tax a business collects is considered state property, not company funds, and must be remitted accordingly. Those responsible for handling the tax collection can become personally liable if these funds are not remitted. In cases where the business fails to collect the required sales tax, liability still applies to the responsible individuals. While collected sales taxes represent state funds held in trust, uncollected or unpaid use taxes are treated as obligations the business should have accounted for but didn’t. Ultimately, the result is often the same.
How Sale Structure Impacts Tax Liability
The structure of a business sales transaction significantly impacts tax liability. If the business interests are acquired, the purchaser acquires all the company’s assets and liabilities in stock sales. Any tax obligations, whether assessed before or after the sale, generally remain with the company. In this scenario, the buyer effectively steps into the seller’s shoes, inheriting assets and potential tax liabilities.
In contrast, an asset sale allows the buyer to acquire specific business assets without assuming all the seller's liabilities. Texas Tax Code § 111.020 imposes specific successor liability requirements on asset purchases concerning sales taxes. If a business assets are sold, the purchaser must withhold an amount sufficient to cover any outstanding tax liability from the purchase price. Otherwise, the purchaser may face liability for sales taxes up to the purchase price value.
This requirement applies even in cases where the seller should have collected taxes but failed to do so or where use taxes were owed on certain transactions before the sale. While asset sales offer more protection from the seller’s liabilities, the withholding requirement under § 111.020 ensures that the state can still pursue the purchaser for certain unpaid taxes if precautions aren’t taken.
Distinguishing whether the sale qualifies as an interest/stock sale or an asset sale, can impact whether successor liability is at play. In an interest/stock sale, the purchaser generally acquires all assets and liabilities of the seller. Therefore, the purchaser would be responsible for unpaid sales tax under the theory of successor liability.
In contrast, an asset sale is a more factual analysis. In Hearing No. 44,506 (January 12, 2006) the state held that a taxpayer who acquired a portion of the assets of a business was deemed to have successor liability, even though only a portion of the seller’s assets were purchased. The state relied upon Hearing No. 35,803, which provided that if all assets were not purchased, successor liability may still be imposed if there are other factual circumstances, such as operating of a similar business at the same location.
It is important to get in contact with one of our Texas sales tax experts to determine if successor liability applies to your purchase of certain assets. Understanding the intricacies of your purchase agreement is important, as relief from successor liability may be sought.
Personal Liability of Corporate Officers and Directors During Corporate Forfeiture
Corporate officers and directors' liability extends beyond sales tax collection. Under Texas Tax Code § 171.255, if a corporation forfeits its privileges due to failing to file reports or pay due taxes, the company’s officers and directors may become personally liable for its debts, including unpaid taxes incurred after the date of forfeiture.
During the forfeiture period, when a corporation loses its privileges due to noncompliance with Texas franchise tax requirements (Texas Tax Code § 171.251), corporate officers and directors are treated as partners in a partnership, shouldering personal responsibility for the company’s financial obligations. Even if the corporation’s privileges are later restored, the personal liability of these officers and directors remains intact for any debts incurred during the forfeiture period.
There are limited exceptions to this liability. Officers or directors may avoid personal responsibility if they demonstrate that the debt was created either over their objection or without their knowledge, provided they exercised reasonable diligence to stay informed about the corporation’s activities (Texas Tax Code § 171.255(c)). This exception is focused on the actions and awareness of the corporate officer or director, irrespective of their role as a "seller" or "buyer."
Protecting Against Successor Liability: Texas's Certificate of No Tax Due
Prospective buyers of existing businesses in Texas face successor liability for any unpaid taxes the business owes. Under Texas Tax Code § 111.020, if a business owner with tax liabilities sells the business, the purchaser must withhold a sufficient amount from the purchase price to cover unpaid or uncollected taxes.
The Texas Comptroller’s provides a useful safeguard for buyers through the Certificate of No Tax Due. This certificate confirms whether the seller has satisfied all tax obligations to the state. Before closing on a business sale, buyers are strongly advised to request this certificate. If the Comptroller’s office issues a Certificate of No Tax Due, the buyer is protected from assuming the seller’s tax liabilities up to the purchase price. If the buyer does not request this certificate, they are liable for their responsibilities under Texas Tax Code § 111.020.
Only the buyer benefits from obtaining a Certificate of No Tax Due. This certificate does not absolve the seller from any prior tax liabilities if issued. The seller remains fully responsible for any penalties, interest, and outstanding taxes accrued up to the sale date.
Obtaining a Certificate of No Tax Due involves a joint request by both the buyer and seller. Senate Bill 873 now mandates that the parties complete and submit Form 86-114, Joint Request for Certificate of No Tax Due, to the Comptroller’s office. Authorized representatives of both parties must sign this form, and all sections must be filled out accurately.
If the seller or the seller's representative refuses to sign Form 86-114, the Comptroller will not issue a Certificate of No Tax Due, exposing the buyer to potential tax liabilities. This refusal should prompt serious caution on the buyer’s part, as it may indicate undisclosed tax issues and an overall lack of good faith on the seller’s part.
Once the joint request is submitted, the Comptroller’s office will review the seller’s account to determine if any taxes, penalties, or interest remain unpaid. If any liabilities are found, the Comptroller will issue a Statement of Account listing the amounts due, which the buyer can use to withhold a corresponding amount from the sale price.
The time required for the Comptroller to issue a Certificate of No Tax Due varies. If an audit of the seller’s financial records is necessary, it may take up to 90 days. In cases where no audit is required, the process is usually completed within ten business days. If the comptroller fails to mail the certificate or statement within the applicable period, the purchaser is released from the obligation to withhold the purchase price or pay the amount due.
The Comptroller’s office will issue one of three results: a Certificate of No Tax Due, a letter explaining why the certificate could not be issued, or a Statement of Account detailing any amounts owed.
A Certificate of No Tax Due prevents the state from pursuing both parties for the same outstanding tax liabilities. While the law does not explicitly prevent the state from attempting to collect from both parties, this certificate shields the purchaser from any liability for the seller’s outstanding taxes. In practice, the state respects the certificate as confirmation that tax responsibilities have been settled, preventing any “double-dip” attempts to collect the same debt from the previous and new owners.
Successor Liability in Action
The financial risks of Texas’s successor liability laws are vividly illustrated in cases where business purchasers inadvertently inherit the seller’s unpaid taxes. Agri-Plex Heating and Cooling, LLC v. Hegar highlights how failing to obtain a Certificate of No Tax Due can have devastating financial consequences.
Agri-Plex Heating and Cooling, LLC, purchased all the assets of an established heating and air conditioning business. Before the sale, neither the seller nor the buyer disclosed any outstanding taxes or secured a Certificate of No Tax Due.
Upon closing, the Comptroller audited the former owner’s business records and discovered unpaid sales taxes predating the sale. When the seller could not cover these tax debts, the Comptroller sought payment from Agri-Plex.
The court held Agri-Plex accountable, pointing out that the buyer had not taken the necessary steps to shield itself from the seller’s tax liabilities. The court explained that Agri-Plex could have asked the Seller to provide a receipt from the Comptroller stating that the amount had been paid or a certificate stating that no amount was due. See Tex. Tax Code § 111.020(a).
Alternatively, Agri-Plex could have exercised the safe harbor provision in subsection (c) and asked the Comptroller for a certificate of no tax due or a statement of the amount required to be paid. See id. § 111.020(c). If the Comptroller had not provided the certificate or statement within 90 days, Agri-Plex would have been released from liability. The court concluded that Agri-Plex could not escape liability under section 111.020 merely because it did not determine whether any tax was due and the specific amount to withhold.
Safeguard Your Business Purchase
If you’re considering purchasing a Texas business and want to ensure you’re protected from unexpected tax liabilities, our experienced Texas sales and use tax professionals will ensure you are prepared and protected.
Whether you are expanding your investments or simply need guidance on acquiring a business in Texas, our tax experts will explain all the nuances involved so that you can make informed business decisions. Don’t risk unforeseen tax burdens—contact our team today for a successful business acquisition.