If you are buying a business in Pennsylvania, 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 Pennsylvania 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 Pennsylvania as a letter for tax status) shows the status of a business’s state tax accounts (specifically, corporation taxes, employer taxes, and sales taxes).
Letters for tax status are issued by the Pennsylvania Department of Revenue (DOR). Requests for a letter must come from a current 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. The request must include the following items:
For more information, check the DOR customer help website.
In cases where most or all of a business’s assets are being bought and sold — often referred to as a bulk sale — the seller should use DOR Form REV-181, Application for Tax Clearance Certificate, to request a bulk sale clearance certificate. (Form REV-181 can be used to request various kinds of tax clearance certificates.) If the buyer to fails to require the seller to provide the DOR-issued certificate, the buyer will be held liable for the seller’s unpaid taxes. Check out this DOR webpage for additional details.
If you are buying a Pennsylvania 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 Pennsylvania Department of State website. When images of creditor financing statements are not available online, you must pay a fee to obtain those images.
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.