If you are buying a business in Arizona, 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 Arizona business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.
A tax clearance letter (also sometimes known in Arizona as a letter of good standing or, simply, tax clearance) is proof that a business is in compliance with all state tax filing and tax payment requirements. Under Arizona law, when a business owner sells his or her business or its stock of goods, he or she must file a final tax return and make a final tax payment within fifteen days of the sale. The buyer of a business must hold back from the purchase price an amount sufficient to cover the seller’s unpaid taxes, penalties, and interest until the seller shows that all taxes have been paid or nothing is due. If the buyer fails to withhold this money, the buyer may ultimately be held liable for the unpaid amounts. For further details, check Section 42-1110 of the Arizona Statutes.
Tax clearances are issued by the Arizona Department of Revenue (ADOR). Use ADOR Form 10523, Tax Clearance Application, to request a clearance. The form is used for various types of tax clearances, not just when a business is being bought and sold. Check the box for “Sale of Business” in the Letter of Good Standing section.
Requests must come from business owners or from people they specifically authorize. That means that if you’re trying to buy a business, you’ll need the cooperation of the current owners to get clearance. A request from a person other than the business owner also must include Form 285B, Disclosure Authorization Form, to show that the requester has been authorized by the owner. For more information, including access to forms, check the ADOR website.
If you are buying an Arizona 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 Arizona Secretary of State website to find out what creditor financing statements are on record. Online searches are free but provide only very basic information. To get more detailed information, you must file a Form UCC-11, Search Request, and pay a fee. For more information including a copy of the form, check the Secretary of State website.
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.
For all the essential information about buying or selling a business, get The Complete Guide to Buying a Business (Nolo) and The Complete Guide to Selling a Business (Nolo), both by Fred S. Steingold.