If you are buying a business in Tennessee, 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 Tennessee business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.
A tax clearance letter (also known in Tennessee as a confirmation of good standing or a certificate of no taxes due) provides evidence that a business does not have unpaid state taxes, interest, or penalties. A buyer of a Tennessee business must withhold a sufficient amount of the purchase price to cover any of such taxes, interest, and penalties until the owner provides a form showing nothing is due. Failure to withhold that money will leave the buyer liable for those charges up to the amount of the purchase price.
Unlike other states, Tennessee 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. However, you can request a confirmation of good standing by calling the Franchise and Excise Tax Registration Unit of the Tennessee Department of Revenue (DOR) or by sending a letter to the DOR. You will need a federal Tax ID number or Tennessee DOR account number for the business. To make a request by phone, call 615-253-0700. Request letters should be dated, signed, and include current contact information.
Only the business owner or someone authorized by the owner can request a tax clearance letter. That means if you are looking at buying a business, you’ll need the cooperation of the current business owner.
For additional information about the rules for withholding purchase money and successor liability, check the DOR’s Tennessee Business Tax Guide.
If you are buying a Tennessee 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 Tennessee Secretary of State (SOS) website. The SOS currently has two webpages for UCC searches: one associated with the ecommerce section of their website and the other associated with the business services section of their website. A UCC filing search provides a record of secured liens that have been recorded on property owned by a business. A free search only provides the most basic information about a filing. For details, you must pay a fee.
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.