Buying a Business in Colorado: How to Avoid Assuming Tax Liability

Find out how to get a tax clearance letter and check for UCC liens in Colorado.

If you are buying a business in Colorado, 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 Colorado business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.

Tax Clearance Letter (Tax Status Letter)

A tax clearance letter (also known in Colorado as a tax status letter) provides confirmation that a business’s tax accounts are paid up with the state taxing authorities. You can obtain a tax status letter from the Colorado Department of Revenue (DOR). Use Form DR 0096, Request for Tax Status Letter. There are twelve taxes payable to the state listed on the form which you can request tax status information on, including state sales, city sales, county sales, corporate income, withholding, consumer’s use, retailer’s use, fuel, and special district. Issuance of a tax clearance letter in Colorado does not guarantee that the buyer is protected from liability if it turns out the seller does owe taxes to the state.

An authorized party, such as an owner or officer of the business, must sign your request. 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 and to obtain a copy of the form, check the DOR website.

UCC Liens

If you are buying a Colorado 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 check the UCC search database on the Colorado Secretary of State website to find out what creditor financing statements are on record. Unless the buyer and seller make other arrangements, a buyer of the business takes that property subject to any prior recorded liens. Colorado’s search site also allows you to search for federal tax liens.

Other Debts

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.

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