If you are buying a business in Kentucky, 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 Kentucky business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.
Kentucky has several laws stating that the buyer (successor) of a Kentucky business can be held liable for the business’s unpaid taxes. These laws are part of a more general set of state laws governing sales and use taxes.
Under Section 139.670 of the Kentucky Revised Statutes (KRS), if a buyer is buying a business or stock of assets from a retailer, the buyer must withhold form the purchase price an amount sufficient to cover any unpaid sales tax amount until the seller produces a receipt showing the amount has been paid or a certificate from the state showing that no amount is due.
Under KRS Section 139.680, if a buyer fails to withhold an amount sufficient to cover unpaid sales taxes, the buyer becomes personally liable for the payment of those taxes. However, the buyer may request a certificate from the Kentucky Department of Revenue (DOR) for a certificate showing that no amount is due. The DOR generally must respond to the request within 60 days (there are special situations where the DOR may respond more than 60 days after a buyer’s request). If the DOR does not respond, the buyer is released from any obligation to withhold money from the purchase price.
The DOR website currently does not provide a downloadable form to request a tax clearance certificate. Contact the DOR directly for further guidance.
If you are buying a Kentucky 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 Kentucky Secretary of State website to find out what creditor financing statements are on record. Unlike many other states, with Kentucky’s online search system, if you find that a business has a listed UCC lien, you can instantly see much of the information from the UCC financing statement, and also click on a hyperlink to view an image of the same statement free of charge.
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.