If you are buying a business in New York, 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 York business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.
The New York Department of Taxation and Finance (Tax Department) advises all potential buyers of businesses to contact the Department before completing a purchase. Unlike other states, New York does not have a single document that can serve as proof that all state taxes are paid in full. Instead, there are several different documents that may apply in a given case.
However, in many cases the most important document relates to bulk sales — the sale of most or all of a businesses assets. In such cases, the buyer should submit Form AU-196.10, Notification of Sale, Transfer, or Assignment in Bulk, to the Tax Department to find out if a business has any unpaid state sales tax or currently is being audited.
Form AU-196.10 doesn’t necessarily need to be signed by a current owner of the business. Instead, it may be signed and submitted by the buyer of the business, as long as the buyer also submits information about the terms of the sale including the purchase price.
In response to the buyer’s submission of Form AU-196.10, the Tax Department will send back either:
A buyer who receives the first of these forms — showing that the seller has no unpaid taxes — won’t subsequently be held liable for seller’s unpaid taxes, if any. However, if a buyer receives the second of these forms, the Tax Department recommends that the buyer not pay the seller until the Tax Department completes a further review of the seller’s sales tax account. If the buyer does go forward with the purchase, the buyer should put the full purchase price into an escrow account.
There also are other rules regarding the submission of Form AU-196.10. For fuller information, including a link to Form AU-196.10, check the webpage on buying a business on the Tax Department website.
Another area of possible tax liability for the buyer of a business relates to unemployment insurance payments. For more information, check this webpage on the New York State Department of Labor website.
If you are buying a New York 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 lien search on the New York Department of State (DOS) website. You can search by debtor, creditor, or UCC filing number. The search page also allows you to look for federal 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.