Successor Liability under the Texas Tax Code – An Important Consideration in the Sale of a Business

Successor Liability

Among the many considerations one should have in the sale of a business are the liabilities that can result subsequent to the sale. Both buyers and sellers should be aware of the tax obligations for the business. This blog specifically addresses the statute pertaining to successor liability under the Texas Tax Code (the “Tax Code”) and explains where this obligation falls. It is important to be familiar with the requirements under this statute to avoid unforeseen liability.

Section 111.020 of the Tax Code states:

(a) If a person who is liable for the payment of an amount under this title sells the business or the stock of goods of the business or quits the business, the successor to the seller or the seller’s assignee shall withhold an amount of the purchase price sufficient to pay the amount due until the seller provides a receipt from the comptroller showing that the amount has been paid or a certificate stating that no amount is due.
(b) The purchaser of a business or stock of goods who fails to withhold an amount of the purchase price as required by this section is liable for the amount required to be withheld to the extent of the value of the purchase price.
(c) The purchaser of a business may request that the comptroller issue a certificate stating that no tax is due or issue a statement of the amount required to be paid before a certificate may be issued. The comptroller shall issue the certificate or statement within 60 days after receiving the request or within 60 days after the day on which the records of the former owner of the business are made available for audit, whichever period expires later, but in either event the comptroller shall issue the certificate or statement within 90 days after the date of receiving the request.
(d) If the comptroller fails to mail the certificate or statement within the applicable period provided by Subsection (c) of this section, the purchaser is released from the obligation to withhold the purchase price or pay the amount due.
(e) A period of limitation during which the obligation of a purchaser under this section may be enforced begins when the former owner of the business sells the business or stock of goods or when a determination is made against the former owner, whichever event occurs later.

Tex. Tax Code Ann. § 111.020 (West 2017).

First, it must be emphasized that § 111.020 does not just apply to the sale of a business, but it also applies to the sale of a business’s “stock of goods.” Arguably, the stock of goods should constitute a substantial amount of the assets of a business in order for there to be successor liability on the purchaser. However, the Tax Code does not define this term, which leaves room for interpretation as to what this means and what this includes. Because this could be interpreted broadly to encompass a wide range of assets, it is important to recognize the liability that stems from this ambiguity.

Additionally, § 111.020(b) puts the obligation on the purchaser of a business or stock of goods to withhold payment from the purchase price for the business’s tax obligations. This means that when a purchaser is buying a business or any assets of the business, the purchaser needs to ensure that there is no remaining tax liability for that business. The purchaser cannot simply rely on the seller’s promise that all tax obligations have been met or even an indemnification clause in the contract pertaining to the seller’s obligations. While the purchaser could always pursue a separate lawsuit against the seller for any misrepresentations or a breach of contract, this does not negate the purchaser’s obligations to pay any outstanding taxes. Consequently, the purchaser needs to ensure that it receives a receipt from the seller, wherein the Texas Comptroller of Public Accounts (the “Comptroller”) confirms that all taxes have been paid, or that it obtains a certificate from the Comptroller stating that no taxes are due.

Finally, a purchaser should be aware of the statute of limitations for successor liability. Section 111.201 of the Tax Code creates a four-year statute of limitations. See Tex. Tax Code Ann. § 111.201 (West 2017). As explained under § 111.020(e), this four-year period begins on the latter of when the former owner sells the business or stock of goods, or when a determination is made against the former owner.

In light of the liability established under § 111.020, it is important to verify that tax obligations have been met prior to the sale of a business. While the purchaser faces potential tax liability for any taxes that remain, the seller faces a potential lawsuit from the buyer for any unexpected costs. This statute establishes rules to safeguard against said liability; thus, both buyers and sellers should ensure the appropriate steps are taken to protect against these unforeseen issues.

Theresa Golde and the attorneys at De Leon Washburn & Ward, P.C. are available to assist clients and out-of-state counsel with business and administrative matters. For more information regarding the firm’s practice areas, please visit our [Link to Insurance Law page], and please feel free to contact the attorneys at any time.
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