If you are buying a business in Alabama, you will want to obtain tax clearance from the state to make sure you are not taking on the seller’s outstanding tax liability. Buyers often assume that if they acquire a business through an asset purchase as opposed to a stock sale then they will not be responsible for any of the seller’s unpaid taxes. However, most states have successor liability rules that allow the transfer of certain tax liability to the buyer even in an asset purchase. Often this type of successor liability is limited to sales and use tax and other excise taxes that a seller collects on behalf of the state.
Obtaining a tax clearance letter from the state is important assurance for a buyer in an asset or a stock purchase that they are not taking on unpaid tax liabilities of the seller. In addition to obtaining tax clearance from the state, a buyer of an Alabama business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.
A tax clearance letter (known in Alabama as a certificate of compliance) is proof that a business has no outstanding liabilities for state taxes administered by the DOR and is up to date with all required state tax filings. Certificates of compliance are issued by the Alabama Department of Revenue (DOR) and are valid as of the date of issue.
Requests for certificates of compliance must be made online. There is a $10 fee for each request. It usually takes 3-5 days to process a request.
DOR responses to requests are sent by email to the requester. If a business is not in compliance, the DOR response will provide contact information for DOR personnel to contact for more information. The DOR will only provide additional information to the business owner or an authorized representative. That means that if you’re trying to buy a business, you’ll need the cooperation of the current owners to get a letter. For more information, check the DOR website.
If you are buying an Alabama business, you’ll also want to make sure the assets you are acquiring are not subject to any liens. You can do this by checking the state’s public records for creditor financing statements. This gives you notice of what secured debt you’ll be acquiring (if any) related to the business’s equipment, inventory, and possibly other items. You will want to do this whether you are buying the business in an asset or stock purchase.
You can do a UCC search on the Alabama Secretary of State website to find out what creditor financing statements are on record. Be aware that the Secretary of State charges fees for UCC searches. Unless the buyer and seller make other arrangements, a buyer of the business takes that property subject to any prior recorded liens. Alabama’s search site also allows you to search for federal and state tax liens as well as other types of liens and judgments.
If you are buying a business, there are other possible kinds of business debt not covered here that you might want to investigate, particularly in a stock acquisition. This could include, for example, unpaid local taxes, guarantees, or other private contractual obligations.