If you are buying a business in Massachusetts, 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 Massachusetts business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.
A certificate of good standing or a letter of compliance (sometimes simply called a tax clearance letter) is proof that a business’s state tax accounts are paid up with the state taxing authorities. For tax clearance purposes, Massachusetts distinguishes between corporations and all other business entities (such as LLCs). A corporation needs to obtain a Certificate of Good Standing. Other types of business need to obtain a Letter of Compliance.
You can obtain either tax clearance document from the Massachusetts Department of Revenue (DOR). The DOR urges you to request the document online through the DOR website. When doing so, the DOR will need to authenticate your online request—in other words, make sure you are authorized to request this information—before the request is processed.
You can also use a paper request form, Request for a Certificate of Good Standing and/or Tax Compliance or Waiver of Corporate Tax Lien. Requests on paper must be signed by an authorized party, such as an owner or officer of the business. That means that if you’re trying to buy a business, you’ll need the cooperation of the current owners to get a letter. For more information, including links for the online filing and paper forms, check the DOR website.
Under Massachusetts law, the buyer of a business must withhold a sufficient amount to cover the seller’s tax obligations unless the buyer gets a certificate. For more specific information, you can read the statute on the Massachusetts Legislature website.
If you are buying a Massachusetts 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 search the UCC database on the Massachusetts Secretary of State website to find out what creditor financing statements are on record. The Secretary of State also has a site to search for tax liens.
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.