If you are buying a business in Arkansas, 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 Arkansas business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.
A tax clearance (or a certificate of tax standing) is a document showing whether or not a business has unpaid state excise taxes. The document is issued by the Office of Excise Tax Administration (ETA).
Requests for clearances or certificates must be made using Form ET007, Authorization for Release of Tax Information. The form has places to indicate the legal form of the business (corporation, partnership, etc.) and whether the business has employees. There is no fee to file a request. It takes approximately 48 hours after receiving the form for the ETA to make a tax status determination. The Arkansas Department of Finance and Administration specifically urges prospective buyers of Arkansas businesses to request a clearance or certificate.
The ETA 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 including a copy of the request form, check the ETA website.
If you are buying an Arkansas 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 Arkansas Secretary of State website to find out what creditor financing statements are on record. You must register with the SOS and pay a fee in order to do a search. Unless the buyer and seller make other arrangements, a buyer of the business takes that property subject to any prior recorded liens.
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.