October 20, 2009
Avoid Liability for the Seller's Sales Tax Liability
Someone buying the assets of another company doesn't expect to be liable for any of the obligations of the seller's company. In fact, the purpose of an asset purchase, rather than buying the shares of the company itself, is to avoid being liable for the selling company's obligations.
Connecticut and many other states, though, have laws that make even a purchaser of assets liable for any delinquent sales tax owed by the selling company.
If you are buying all or substantially all of a business or stock of goods of a business, you will also inherit all of the company's sales tax liability. You can avoid the liability if you hold some of the purchase price in escrow. Under Connecticut General Statute 12-424 (1), the purchaser of a business or stock of goods is required to withhold enough of the purchase money to pay the seller's tax liability until the seller produces a receipt from the Commissioner of Revenue Services showing that the liability has been paid or a certificate showing that no amount is due. If you don't hold this amount, you will be personally responsible for paying the State for the seller's tax liability as provided in Conn. Gen. Stat. § 12-424(2) up to the entire amount that you paid for the assets.
The problem for the purchaser of the business is that the DRS cannot issue a tax clearance letter until after the closing. The lawyer for the purchaser must therefore request an escrow letter from the DRS. The letter will state the amount of funds to be withheld from the purchase price at time of closing for potential sales taxes owed by the seller.
The purchaser should never close without a DRS letter indicating the amount of funds to be escrowed sufficient to discharge the potential sales tax liability of the seller. After the closing, the DRS then has 60 days to issue the Tax Clearance Letter that guarantees the purchaser that there will be no successor tax liability.
Failure to follow the terms of the statute may result in costly litigation and business disruption from unanticipated state tax claims. It is important that anyone buying, selling or acquiring a business in Connecticut know about the Connecticut sales tax clearance letter. Our firm's attorneys have handled many business acquisitions in Connecticut, ranging from assets purchases and sales of liquor stores, Dunkin Donuts franchises, machining companies, and professional practices such as accountant, actuaries, law firms, and medical practices.