Buying a Business in Virginia: How to Avoid Assuming Tax Liability

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

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

Tax Clearance Letter (Tax Certificate)

A tax clearance letter (also known in Virginia as a tax certificate) is proof that a business’s state tax accounts are paid up. Under Virginia law, the buyer of a business (also known as the successor) must withhold a sufficient portion of the purchase money to cover the amount of any unpaid taxes, penalties, and interest due until the seller produces documentation from the Department of Taxation showing that payment has been made or a certificate stating that no taxes, penalties, or interest are due. A buyer who fails to withhold money for unpaid taxes becomes personally liable for those amounts. Check Section 58.1-629 of the Virginia statutes and Section 23VAC10-210-3090 of the Virginia Administrative Code for more details.

You can obtain a tax certificate from the Virginia Department of Taxation (DOT). Your request must be in writing and come from a current officer or owner 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. There is no DOT form to make the request. For more information, the DOT advises you to call their customer service line at 804-367-8037.

You can mail or fax your request to:

Virginia Department of Taxation
P.O. Box 1115
Richmond, VA 23218
Fax number: (804) 254-6111

In Virginia, when a business changes ownership, the original owner must close the business and the new owner must register with the Department of Taxation as a new business. Check the DOT website regarding Form R-3 for more information.

UCC Liens

If you are buying a Virginia 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 lien search on the Virginia State Corporation Commission (SCC) website (the SCC search site is known as the Clerk’s Information System). Free searches provide only basic information. To obtain detailed information about collateral you must pay a fee. The Clerk’s Information System also allows you to search for federal tax liens.

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.

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