Buying a Business in the District of Columbia: How to Avoid Assuming Tax Liability

Find out how to check for UCC liens and get a state-issued tax clearance letter in the District of Columbia.

If you are buying a business in the District of Columbia, 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 District of Columbia business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.

Tax Clearance Letter (Clean Hands Certificate)

Unlike most states, the District of Columbia does not have a tax clearance letter or certificate issued by the DC government to provide proof to a business buyer that the business does not have unpaid local taxes.

The District of Columbia does have a Bulk Sales Act that requires the buyer of an existing business to notify the DC Office of Tax and Revenue (OTR) of the terms and conditions of the sale at least 15 days before taking over the business. If the buyer doesn’t comply with the Act, the buyer can be held responsible for the seller’s unpaid taxes. Buyers can get more information and send notifications of a purchase to:

Office of Tax and Revenue
PO Box 37559
Washington, DC 20013
Attention: Special Investigations Unit
Telephone: (202) 724-5045

The District of Columbia also has a so-called Clean Hands Law. This law prohibits people and businesses from obtaining various business-related licenses and permits if they owe more than $100 to the DC government or have failed to file District tax returns. People and businesses must submit a Clean Hands certification form when applying for a DC license or permit. A person can submit a form online at the OTR website to obtain a clean hands certificate.

For more information about the Bulk Sales Act, the Clean Hands Law, and other information related to DC tax collections, check the Collection Information webpage of the OTR website.

UCC Liens

If you are buying a District of Columbia 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.

Unlike most states, the District of Columbia government does not maintain its own online UCC search site. Instead, the District of Columbia Recorder of Deeds, which is part of the OTR, directs people to a privately owned website where you can search for creditor filings of UCC financing statements. You must register with the site before you can do searches.

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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