Successor liability: buying a business that owes sales tax

States want to stop owners from selling a business, pocketing the proceeds and leaving the sales tax unpaid. Successor statutes put the buyer on the hook — usually up to the purchase price — unless the buyer protects themselves.

California's Regulation 1702 requires the purchaser of a business or stock of goods to withhold enough of the purchase price to cover the seller's tax liability. The duty arises in a sale under a contract that provides for a purchase price in money or property, or for assumption of liabilities, and only to that extent. A buyer who fails to withhold, and doesn't obtain a tax clearance certificate, can become personally liable up to the purchase price. Other states have similar rules with different procedures — see your state sales tax page.

• Ask the seller for recent sales tax returns and account status.
• Request a tax clearance or certificate from the state before closing, where available.
• Hold back part of the price in escrow until the clearance arrives.
• Put tax indemnities in the purchase agreement — but remember the state isn't bound by them.

Selling doesn't end your own liability, and buyers will discover unpaid tax in due diligence. Clearing or arranging a payment plan before listing usually raises the price you can get. Unpaid collected tax can also lead to personal liability for owners after the business ends.

Respond to any successor notice quickly; the amount is often capped at the purchase price, and the purchase contract and closing documents matter. Run the free assessment with "Sold" or "Operating" status to see options.