If you are buying a business in Hawaii, 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 Hawaii business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.
The Hawaii Department of Taxation (DOT) issues two types of certificates related to a business’s tax status. A tax clearance certificate certifies that a business has filed all required tax returns and paid all taxes, penalties, and interest due as of the date the certificate is issued. A bulk sales certificate more narrowly states that the seller has paid all GET (sales taxes), penalties, and interest due, and that there is no recorded lien on the seller’s property. Both certificates can be important to the buyer of a Hawaii business or its assets.
If the buyer of a business does not obtain a bulk sales certificate, the buyer will be liable for any of the business’s unpaid GET amounts. Because the buyer will otherwise be held liable for these unpaid taxes, the buyer must withhold the purchase price until the DOT certifies the bulk sales certificate. In addition, the DOT recommends that a buyer also get a tax clearance certificate.
Use Form A-6, Tax Clearance Application, to request a tax clearance certificate. Requests must come from a current owner or officer of the business, or someone legally authorized by the owner through a power of attorney. That means that if you’re buying a business in Hawaii, you’ll need the cooperation of the current owner to get the tax clearance certificate.
Use Form G-8A, Report of Bulk Sale or Transfer, to request a bulk sales certificate. The form includes places to enter the names of the seller and the buyer. In general, it is the seller’s responsibility to file this form within 10 days of the buyer taking over the business or its property. However, the DOT also states that either the buyer or the seller may file the request for the bulk sales certificate
For additional information about tax clearances in relation to selling a Hawaii business, check the DOT’s guide, An Introduction to the Tax Clearance Procedure. For other information, including access to forms, check the DOT website.
If you are buying a Hawaii 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 search for UCC and other liens through the Department of Land and Natural Resources website. A free search only provides basic information. For details, including copies of UCC financing statements, you must pay a fee.
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.