If you are buying a business in Maryland, 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 Maryland business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.
A tax clearance letter (known in Maryland as a good standing certificate) proves that a business is authorized to transact business in Maryland and all fees, taxes, and penalties owed to the state are paid. The certificate is often used when a buyer of a business wants proof that the company is not behind on its state tax payments.
Good standing certificates are issued by the Comptroller of Maryland. Use the Good Standing Certificate Request form to request a certificate. You will need the business’s tax ID number to make the request. That means that if you’re trying to buy a business, you’ll need the cooperation of the current owner to get a letter. For more information, check the Comptroller of Maryland website.
Apart from a state-issued good standing certificate, some Maryland counties issue certificates relating to county personal property taxes. One example is Montgomery County.
If you are buying a Maryland 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, Maryland state government does not provide its own online system to search UCC filings. Instead, the Maryland Department of Assessments and Taxation (SDAT) website provides a link to a list of private companies that will perform UCC searches for you.
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.