If you are buying a business in Delaware, 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 Delaware business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.
Delaware state offices issue at least two kinds of documents related to a taxpayer’s state tax liability. The Division of Revenue (DOR) issues certificates of tax clearance which cover corporate and personal income taxes. The Secretary of State (SOS) issues certificates of good standing which cover franchise taxes.
To request a certificate of tax clearance from the DOR, you need to provide the name of the corporation, its federal tax ID number, and the state of incorporation. There is a $40 fee for the certificate. Send your request by mail or email to:
Division of Revenue
Attn: Stephen Seidel, MS 18
P.O. Box 8763
Wilmington DE 19899-8763
To request a certificate of good standing from the SOS, you can use their certification request memo or draft your own request. There is a fee to file the request.
If you are buying a Delaware 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.
Unlike most other states, the State of Delaware does not maintain its own website for UCC lien searches. Instead, Delaware requires you to use private entities that it calls Delaware Authorized Searchers.
Unless the buyer and seller make other arrangements, a buyer of the business takes that property subject to any prior recorded liens. Delaware’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.
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.