Buying a Business in Ohio: How to Avoid Assuming Tax Liability

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

If you are buying a business in Ohio, 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 an Ohio 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)

Under Ohio law, if you are buying a business, you must create an escrow account. You should put enough money into that account to cover the purchase price for the business plus any outstanding debt. Then, before releasing those funds to the seller, ask the seller to provide you with a tax release certificate (sometimes called simply a tax release) from the Department of Taxation (DOT).

The DOT will issue a release (meaning no taxes are due) after two conditions are met:

  • the seller has filed a final tax return; and
  • the DOT has reviewed the seller’s tax accounts and found that all taxes have been paid, all sales tax returns have been filed, and all other filing and reporting requirements have been met.

A tax clearance certificate states that no sales and use taxes, or admissions and dues tax, or both, are due from the seller. The certificate relieves the buyer from any related tax liability. That means that, unlike in other situations, the buyer does not need to withhold money from the purchase price of the business to cover cleared taxes. The certificate will either state that the buyer does not have any tax liability or that the buyer must withhold a certain amount from the purchase price to cover the seller’s unpaid taxes.

For the statute governing this issue, check Ohio Revised Code section 5739.14.

UCC Liens

If you are buying an Ohio 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 the Ohio Secretary of State website.

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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