If you are buying a business in Texas, 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 Texas 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 Texas as a certificate of no tax due) is proof that all of a business’s state taxes are paid in full. Under Texas’s statutes and administrative code, the buyer of a Texas business must withhold an amount from the purchase price sufficient to pay any of the seller’s unpaid taxes until the seller presents a certificate of no tax due to the buyer. The buyer does not need to withhold an amount greater than the purchase price. A buyer who fails to comply with the withholding rules may be held liable for the seller’s unpaid taxes.
Certificates of no tax due are issued by the Texas Comptroller. You can submit a request on paper, by fax, or by email. The seller of the business must authorize the request. That means that if you’re trying to buy a business, you’ll need the cooperation of the current owner to get a certificate. For more information, check the publications on buying an existing business on the Comptroller’s publications website.
You can mail, fax, or email your request to:
Texas Comptroller of Public Accounts
P. O. Box 13528
Austin, Texas 78711-3528
Fax number: 512-475-0349
If the Comptroller fails to respond to a request within a certain number of days (usually 60 days after receiving the request), the buyer is released from liability for the seller’s unpaid taxes. For details, check Section 111.020 of the Texas Tax Code and rule 3.7 under the Tax Administration chapter of the Texas Adminstrative Code.
If you are buying a Texas 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 Texas Secretary of State (SOS) website. The Texas SOS requires you to register before doing any search and charges a fee for all searches.
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.