Buying a Business in South Dakota: How to Avoid Assuming Tax Liability

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

If you are buying a business in South Dakota, 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 South Dakota 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)

Unlike most other states, South Dakota does not have an online form to obtain, or online information about how to obtain, a document showing that a business has no unpaid state taxes. In South Dakota, you can request this type of document — which some state tax officials call a tax clearance certificate — by contacting the Department of Revenue (DOR). The certificate is available for both corporations and LLCs. You will need to provide the name of the company, its address, what kind of business it does, and possibly other identifying information. The person making the request must be either the business owner or someone authorized by the business owner. That means that if you are buying the business, you will need the cooperation of the current owner.

To request a tax clearance certificate, call the main DOR phone number: 605-773-3311.

UCC Liens

If you are buying a South Dakota 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 South Dakota Secretary of State (SOS) website. A UCC filing search provides a record of secured liens that have been recorded on property owned by a business. You must first register and pay a fee online with the SOS before you can run a search.

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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