If you are buying a business in Montana, 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 Montana 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 Montana as a certificate of good standing) is a statement that a Montana business has no state tax due. Certificates of Good Standing are issued by the Montana Department of Revenue (DOR). Request a certificate with Form CR-T, Application for Tax Certificate. On the application you can request a certificate for any of several reasons; if the reason is buying or selling a business, choose the “Good Standing” checkbox.
The application must be signed by a current owner 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, check the DOR website.
A Montana Certificate of Good Standing is different from a Montana Tax Clearance. Tax Clearance is used to show that a business’s final tax return has been filed and all taxes have been paid.
In general, you are liable for the seller’s unpaid taxes and must withhold the amount of those unpaid taxes from the sales price until the seller provides a clearance document from the DOR showing no tax is due. However, you are not liable if you give written notice to the DOR that you are acquiring the business and no assessment is issued against the seller within six months of the DOR receiving your notice. You can read the relevant statute here.
If you are buying a Montana 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 filing search on the Montana Secretary of State website. Montana requires you to create an online account before you can run UCC searches on the state’s website.
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.