If you are buying a business in California, 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 a California 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 California as a certificate of tax clearance) shows whether a business owes the state any sales and use taxes, interest, or penalties. Certificates of tax clearance are issued by the California State Board of Equalization (BOE). You should request a certificate before you complete the purchase of a business to avoid liability for the previous owners unpaid taxes, interest, or penalties.
Requests for certificates of tax clearance should be in writing. There is no BOE form to request a certificate of tax clearance so you will need to prepare your own. The request should contain the following information:
If the business has more than one location, request a clearance for each location.
If the BOE does not issue a tax clearance, the buyer is required to withhold enough money from the purchase price to cover whatever the seller owes the BOE until the seller provides evidence that taxes are now paid or no taxes are due. If the BOE does issue clearance, the buyer does not need to set aside money.
Other rules also apply when dealing with tax clearance. Some of these rules apply to business buyers and others to people selling or simply closing a business. For more information, check the BOE’s FAQ page on buying, selling, or discontinuing a business.
If you are buying a California 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 California Secretary of State website to find out what creditor financing statements are on record. This online search site, known as UCC Connect, charges fees for UCC searches. You have the option to either do limited individual searches or register and pay for a subscription. With a subscription you can perform so-called bulk searches. For individual searches, you will need the name, address, and phone number of businesses that are on file with the state.
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.