The Third Court of Appeals recently held that a buyer of the assets of a small business was liable for the sales tax liability incurred by the business prior to the sale. This potential liability is known as “successor liability.” Successor liability may arise when an individual or a business entity purchases assets of an existing business, and unknowingly assumes the business’s tax liability as a result of the purchase. See Tex. Tax Code § 111.020. If a buyer fails to withhold the amount specified by the Comptroller, the buyer will be personally liable up to the amount of the purchase price, for the taxes of the seller. See Tex. Tax Code § 111.020(b).
The seller can request that the Comptroller issue a certificate stating that no tax is due or the amount that must be paid before a certificate can be issued. See Tex. Tax Code § 111.020(c). The Comptroller must issue the certificate or statement within 60 days after receiving the request or within 60 days after the records of the business seller are made available for audit, whichever period expires later, but no later than within 90 days after the date of receiving the request from the buyer. A tax clearance certificate operates as an absolute defense to liability.
Agri-Plex purchased the assets of a small heating and air conditioning business. The buyer and seller were not aware of a potential sales tax liability at the time of sale and did not request a tax clearance certificate. The Comptroller later conducted an audit of the seller’s pre-sale business records and assessed a deficiency against the seller. The Comptroller did not collect the pre-sale tax liability from the seller. Instead, he assessed the liability against Agri-Plex, the buyer.
The Comptroller argued that Texas Tax Code § 111.020 imposed a duty upon Agri-Plex to withhold the amount of the seller’s sales tax liability from the purchase price at the time of closing. However, the seller and buyer were unaware of any potential sales tax liability at the time of the sale.
The Third Court of Appeals held that the buyer (Agri-Plex) was liable for the pre-acquisition sales taxes, up to the amount of the purchase price. The Court noted that the Tax Code provides mechanisms for innocent buyers to use in order to avoid liability for sellers’ taxes. Agri-Plex could have asked the seller to provide a receipt from the Comptroller stating that the amount had been paid, or a tax clearance certificate stating that no amount was due. See Tex. Tax Code § 111.020. If the Comptroller failed to provide the certificate or statement within 90 days, then Agri-Plex would have been released from liability. See Tex. Tax Code § 111.020(b).
Because Agri-Plex failed to request a receipt or certificate from the seller, the Court held that Agri-Plex could not escape liability under § 111.020.