Tuesday, October 28, 2008

SALES TAX - Avoiding 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.

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