Purchasers of Existing Businesses on the Hook for Taxes
the The last thing a purchaser of the assets of another company wants to find out is that he or she has become liable for the past obligations of the seller’s company. Since Connecticut General Statutes § 12-424 was amended in 2011 by Public Act 11-61, § 58, a buyer can be potentially responsible for sales and use taxes, admissions and dues taxes and income taxes, not to mention interest and penalties. The irony of the law lies in the fact that anyone selecting an asset purchase rather than a stock acquisition does so for the very purpose of avoiding responsibility of business liabilities. If you are buying all or substantially all of a business or stock of goods of a business, be mindful that the company’s tax liabilities may come attached to the goodwill or inventory.
The potential fallout from successor liability can be devastating to any business acquisition. Once a successor liability assessment has been made, the purchaser may only protest its status as a successor and cannot dispute the underlying delinquency. At that point, the only ceiling on liability is the full purchase price, hardly a paltry sum in most cases. In an informative case from 1994, a Connecticut court said that the purpose of the successor liability statutes is to secure collection of taxes by imposing derivative liability on purchasers of a business who are generally in a better financial position to collect or pay the tax from the sale price than the seller quitting the business. The reasoning of the Legislature seems to be that it is easier to collect on taxes from someone still running a business than from the one who cashed out and moved on. Of course, this holding does not address the potential double recovery – the buyer got paid for the business and dumped the responsibility for taxes on someone else. Meanwhile, the buyer suffers a double penalty having potentially paid for the business twice.
Fortunately, there is a way to avoid the avalanche of finding out that you are responsible for debts you never accrued. You can avoid liability by requesting a tax clearance certificate once you commit to purchase the business or stock of goods, but before the date of the closing. The Connecticut Department of Revenue Services (DRS) then has 60 days to issue a tax clearance certificate, releasing the purchaser from tax liabilities or to issue an escrow letter, providing the amount required to be withheld from the purchase price to cover the liability of the seller for taxes due and unpaid on the date of sale. If an escrow letter is issued, it must be carefully adhered to by withholding a sufficient amount from the purchase price to cover all the liabilities.
Waiting the two to three months may seem like aneternity in today’s ever-changing business environment, but it is a small price to pay for peace of mind. Every business acquisition is fraught with unknowns. Failure to anticipate potential issues and to protect your investment is a serious problem that is costly in the long term. Obtaining competent counsel early in the process is essential to making the path to closing a smooth one.
Trendowski & Allen, P.C. has handled many asset purchase and stock acquisition transactions involving retail stores, liquor stores, franchises, restaurants and professional practices and can also help start up new businesses on the right footing.