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

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

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

Tax Clearance Letter (Letter of Good Standing or Tax Clearance)

The Indiana Department of Revenue (DOR) issues several documents related to a business’s tax status. A letter of good standing is issued to corporations and provides proof that a corporation has filed all required tax returns and paid all outstanding tax liabilities. A tax clearance (as it is simply called by the DOR) often is associated with a taxpayer receiving a so-called tax protest letter, which states that some state taxes are unpaid. Tax clearances commonly are issued in relation to state-issue licenses, such as an alcohol and tobacco license, a dealer license, or a professional license.

Under Indiana case law, the buyer of a business’s assets may be liable for the seller’s unpaid taxes. One situation where there may be such successor liability is when the buyer is a “mere continuation” of the seller. The key case, from 1999, is Sorenson v. Allied Products Corp. (Of course, this case always is subject to being modified or overruled.)

A request for a letter of good standing must be on the corporation’s letterhead and include the following information:

  • official name of the business
  • address of the business
  • federal identification number (FEIN)
  • date of incorporation in Indiana or date qualified to do business in Indiana
  • corporate officer's signature and title (must be an original signature)
  • name and the FEIN of the reporting organization if the organization files as a member of a consolidated group
  • other pertinent information, such as a deadline for a response; and
  • mailing instructions — complete address of where the letter is to be mailed if different from the corporate address.

Mail the completed request to:
Indiana Department of Revenue
Tax Administration
P.O. Box 6197
Indianapolis, In 46206-6197

Because the request must come from the corporation being sold, if you are buying the business or its assets, you will need the cooperation of the corporation’s current owner.

To request a tax clearance, use State Form 53227, Tax Clearance Form. The form works for various forms of business, including corporations, partnerships, and sole proprietorships. For more information about tax clearance matters, including access to forms, check the DOR website.

UCC Liens

If you are buying an Indiana 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 Indiana Secretary of State website to find out what creditor financing statements are on record. Be aware that you must pay to see any information other than a debtor’s name.

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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