If you are buying a business in Utah, 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 Utah 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 Utah as a certificate of no taxes due) is proof that all of a business’s state taxes are paid up. Under Utah law, if you are buying a Utah business, you must withhold any amount of unpaid tax from the purchase price of the business. You must then pay any unpaid taxes within 30 days of completing the purchase. As part of the transaction, you should have the seller give you either a receipt showing that all sales and special fuel taxes have been paid, or a tax clearance letter from Utah State Tax Commission (USTC).
As a buyer, if you fail to follow these rules, you can be held liable for any unpaid taxes. You can find additional guidance on the USTC webpage covering successor liability.
Certificates of no taxes due are issued by the USTC. To request a certificate, use Form TC-42, Application for a Certificate of No Taxes. The form must be signed or authorized by 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. For more information and a copy of the form, check the USTC website.
If you are buying a Utah 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 Utah Department of Commerce website. A UCC search provides a record of secured liens that have been recorded on property owned by a business. In addition, a separate website, run by the Utah Courts, allows you to search for tax liens.
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.