If you are buying a business in Washington, 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 Washington 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 Washington as a tax status letter) shows whether a business has any unpaid state taxes. Under Washington law, the buyer of a business must hold back enough money to cover any of the seller’s unpaid taxes unless the seller provides proof that no taxes are owed. If any unpaid taxes are not paid within ten days of the sale of the business, the buyer is liable for the full amount. To avoid this liability, the buyer should obtain a tax status letter from the seller.
Tax status letters are issued by the Washington Department of Revenue (DOR). You can request a letter by using Form 42-2443e, Request for Tax Status. Your request must be authorized by 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. For more information, including access to the request form and exactly which business assets are taxable, check the DOR website.
If you are buying a Washington 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 Washington State Department of Licensing (DOL) website. The UCC search results also include federal 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.