When someone buys a business, he or she (or it) faces the prospect of becoming liable for any unpaid sales tax liability of the predecessor business. The Wisconsin Statutes provide a procedure to obtain a Sales Tax Clearance Certificate which will limit the successor liability for sales taxes to that amount determined by the Wisconsin Department of Revenue. The procedure requires that a portion of the purchase price be withheld to pay any potential sales tax liability and that certain disclosures be made to the Department. Doing so sets in motion a fixed timeframe in which the Department may make the determination as to the amount of any additional sales tax owed by the seller.
The Sales Tax Clearance Certificate can only be requested or received following the sale of the business. This is because the Department of Revenue is looking for a final end date as to when any sales tax obligations of the seller would cease.
To obtain a Sales Tax Clearance Certificate, the buyer of the business should make a written request for the certificate and provide the following information:
1. The name of the seller
2. The seller’s permit number of the seller
3. The current mailing address of the seller
4. The name of the buyer
5. The seller’s permit number of the buyer
6. The mailing address of the buyer
7. The date of the sale
8. The sale price
Furthermore, it is prudent to include information concerning the amount of the purchase price that has been withheld to cover any additional sales tax due.
Once the request for a Sales Tax Clearance Certificate is made, the Department of Revenue has 90 days to determine whether additional sales tax is due. If the Department does not act within that 90 day time period, the buyer is relieved of any successor liability.
After receiving notice from the Department of Revenue of the amount of sales tax that the seller owed, any amounts that are escrowed may be paid to the Department and the balance to the seller of the business. No further successor liability will arise. Absent a Sales Tax Clearance Certificate, however, no such procedural guaranty will apply to relieve the buyer of a business from potential successor liability.
Determining whether the successor liability rules could subject the buyer of a business to its existing Wisconsin sales tax liability may require some legwork. Unfortunately, because the amount of a seller’s tax liability is usually not public information, it can be difficult to determine the exact exposure for the successor liability of sales taxes when buying a business or its assets.
The best way to avoid a successor liability problem is to conduct adequate due diligence. The purchaser of a business should request copies of all sales tax returns for a period of time sufficient to establish a degree of comfort with the amount of sales taxes that were owed. Additionally, seek information establishing that the amounts owed were, in fact, paid. If the seller is too resistant in providing this information, it could be a warning sign that the business should not be purchased.
If a sales tax liability is uncovered or expected, the parties to a business sale can agree to withhold (in escrow) a portion of the purchase price for payment to the Department of Revenue. Doing so is part of the process of obtaining a Sales Tax Clearance Certificate that provides a legal safeguard against the successor liability rules. If the escrow exceeds the actual sales tax liability the balance can be paid to the seller.
Under the Wisconsin sales tax laws, the purchaser of a business can be subject to the predecessor business’ unpaid sales tax liability. The extent of successor liability for sales taxes, however, is limited to the amount of the purchase price paid for the business. Therefore, if someone pays a half-million dollars for a business that has a million dollar sales tax liability, the purchaser’s exposure for the unpaid tax will be limited to a half-million.
It follows, therefore, that if there is no purchase price, there is no successor liability. Further, the successor liability is tied to the location of the business purchased. If only one location of an existing chain of businesses is purchased, successor liability is limited to the sales tax liability attributable to that one location.
It is important to note, however, that while the successor liability is limited to the amount of the purchase price, the “purchase price” consists of any value that is paid for the business. This purchase price includes not only cash or installment payments but also value of any property transferred in exchange for the business and the assumption or payment of any debt on behalf of the purchased business. Using the above example, even if the entire half-million dollar purchase price is paid to secured creditors of the business, the purchaser can still face successor liability to the extent of that half-million dollars.
On October 25th and November 1st, Attorney Barry White will join Diane Chamness on her Saturday radio program "Business Solutions With Diane Chamness." In both shows, Barry will be holding "Open Mic" sessions where he will be answering legal questions that listeners have. Tune in for both segments on WISN 1130 in Milwaukee from 1-2 pm CST.
If you are outside of the listening area, you can tune in and listen live by visiting Diane Chamness' website at http://www.dianeonbusiness.com/ Diane's show runs on a weekly basis at the same time and addresses various issue relevant to business owners.
“My father has a great expression: ‘The capital gains tax has created more millionaires than any other government policy.’ The capital-gains tax tends to make investors hold longer. That is almost always the right decision.”