By Jon Wellington, J.D., State and Local Tax Principal
Many business owners know that when they acquire another business entity that they will be assuming any potential tax liabilities of the acquired business, known as, “successor liability.” But Texas laws also allow for successor liability even if you purchase some — but not all — of another company’s assets. It is therefore important to make sure that you are aware of these laws, and how to avoid the most common pitfalls.
Texas provides that the purchaser of a business becomes liable for taxes, penalties, and interest owed by the seller. The only ways to avoid that result are: 1) for the purchaser to withhold from the purchase price an amount sufficient to pay the taxes due, or 2) for the seller to provide a receipt from the comptroller showing that the amount has been paid, or that no tax is due (a tax clearance certificate). Failure to do one of those two things will result in the purchaser becoming liable for the taxes due up to the amount of the purchase price.
Successor liability can also occur without the actual sale of a business. The above rules can also apply to the sale of 1) the capital assets of a business, 2) the name and goodwill of a business, 3) the inventory of a business, or 4) fixed assets and real property necessary to operate a similar business as the seller at the same location.
Given the potentially broad scope of successor liability, the safest thing is to get a tax clearance certificate, although the comptroller has up to 90 days to issue the certificate. The next best thing to do is to perform an analysis of the seller’s state tax liabilities to determine a proper amount to withhold from the purchase price. Lastly, you should always request an indemnification clause in any purchase agreement to require the seller to reimburse you for any state tax liabilities that may arise.
Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt LLC, call (214) 871-7500 or email firstname.lastname@example.org.
Jon Wellington is a licensed attorney that has spent nearly 20 years serving the public. Specializing in matters unique to state and local taxation (“SALT”), Jon is the leader of the firm’s SALT practice. Drawing on experience working with some of the largest accounting firms in the world, Jon’s expertise in SALT matters includes audit defense, income and franchise tax planning, sales and use consulting, nexus studies, and property tax minimization. Jon is exceptionally well-versed in the SALT needs for clients in the construction, manufacturing/distribution, and not-for-profit sectors.