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

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

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

Tax Clearance Letter (Tax Clearance Certificate)

Iowa has several rules stating that the buyer of business can be held liable for the seller’s unpaid taxes. One such rule covers buyers of retail businesses. Under this rule, the buyer must inquire whether the seller has any tax, interest, or penalties due — and to withhold money from the purchase price to cover any such amounts. For more information, check Section 701-12.14 of the Iowa Administrative Code.

Another rule is described in Section 421.28 of the Iowa Code. Under this statute, the successor to a licensee or retailer is liable for the seller’s delinquent taxes, interest, and penalties unless the buyer can show that the purchase was made in the good faith belief that no such amounts were due. For the purposes of this law, the buyer can demonstrate good faith by showing that the Iowa Department of Revenue (DOR) provided a certified statement that there were no delinquent amounts.

Unlike other states, Iowa’s DOR website does not provide a form or specific instructions on how to request a certified statement. However the foregoing statute does state, in general terms, that the seller may request that the DOR inform a buyer regarding the amount of any unpaid taxes, interest, or penalties. You should contact the DOR for detailed guidance.

UCC Liens

If you are buying an Iowa 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 Iowa Secretary of State website to find out what creditor financing statements are on record. The same site also gives you the option to do a search for federal tax liens. Unlike many other states, with Iowa’s online search system, if you find that a business has a listed lien, you can click on a hyperlink to instantly download an image of the relevant statement (such as a UCC financing statement or notice of federal tax lien) free of charge.

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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