Buying a Business in New Jersey: How to Avoid Assuming Tax Liability

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

If you are buying a business in New Jersey, 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 New Jersey 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)

A tax clearance letter (known in New Jersey as a tax clearance certificate) is a statement showing that a New Jersey corporation has paid all state taxes it owes, including any penalties, interest, or fees due. Tax clearance certificates are issued by the New Jersey Division of Taxation (DOT). To request a certificate, use Form A-5088-TC, Application for Tax Clearance Certificate. The application must be signed by a corporate officer. That means that if you’re trying to buy a corporation, you’ll need the cooperation of the current owners to get a certificate. There is a $25 application fee. For more information, check the DOT website.

You can mail your application to:

State of New Jersey

Department of the Treasury

Division of Taxation

PO Box 269

Trenton, NJ 08695-0269

UCC Liens

If you are buying a New Jersey 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 a special New Jersey government website. An initial search on the site will only provide names of businesses that have some kind of UCC lien. To obtain more detail about the lien, you must pay a fee.

Apart from UCC liens, New Jersey Courts has a separate website — of civil judgments (money owed from losing a lawsuit) — where you can search for individuals and businesses.

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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