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

As a follow up to my blog on successor liability, there are further considerations regarding what a “successor” entails. For quick context, my previous blog on successor liability discussed § 111.020 of the Texas Tax Code (“Tax Code”), explaining that when a buyer purchases a business or stock of goods, any pending tax obligations of the seller fall on the buyer. Thus, it is essential that the buyer take appropriate steps to ensure the seller does not have any remaining tax obligations before proceeding with the sale of the business or an asset purchase agreement.

The term “stock of goods” is an ambiguous term. While the Tax Code does not define this phrase, Rule 3.7(d) of the Texas Administrative Code (“TAC”) provides context on what falls under the sale of a business. It states:

When determining if a “business” has been or will be sold, the comptroller will examine the transaction to determine what the parties to the transaction intended to buy and sell. The answer in each situation will depend on the type of business involved. A seller may have sold a “business” even when few assets were transferred. Depending on the type of business involved, a “business” may be sold if an owner sells:

  1. a building, land, furniture, fixtures, inventory, and the right to use the seller’s trade name; or
  2. all the capital assets of a business; or
  3. the name and goodwill of a business; or
  4. all the inventory of a business; or
  5. fixed assets and realty necessary to operate a similar business as the seller at the same location. Tex. Admin. Code R. 3.7(d).

Notably, this rule emphasizes that the sale of a “business” in the context of successor liability could involve “few assets” and its list highlights what these few assets can include. Various decisions from the Texas Comptroller of Public Accounts (“Comptroller”) have shown successor liability upheld against a buyer based on the purchase of just parts of a business. For example, under Comptroller Decision No. 37,696 (1999), successor liability was upheld when a buyer purchased a restaurant’s name, goodwill, furnishings, inventory, and operated in the same location. Additionally, under Comptroller Decision No. 33,510 (1995), successor liability was upheld when a buyer purchased a restaurant’s equipment, amenities, dishes, utensils, and operated in the same location under a different trade name.

In practice, this means that when a buyer is looking to purchase any part of a business, the buyer needs to ensure with the Comptroller that the seller has no pending tax obligations. Even if a seller contractually claims said obligation is met, this does not prevent the Comptroller from later assessing successor liability against the buyer. Consequently, a buyer needs to “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.” Tex. Tax Code Ann. § 111.020(c) (West 2017). If the seller owes any remaining taxes, these taxes need to be paid before proceeding with the sale. The Tax Code states that the buyer “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.” Tax Code § 111.020(a).

The successor liability statute under the Tax Code specifically addresses how to proceed with the sale of a business or its stock of goods to prevent successor liability. Because TAC 3.7(d) broadly encompasses several aspects of a business, the statutory rules set forth under the Tax Code must be carefully followed when one is looking to buy either the entirety of a business or any part of a business. Through due diligence, both buyers and sellers can ensure they are protecting themselves against unforeseen issues.

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© De Leon Washburn & Ward, P.C.  This article is provided for informational purposes only.  It is not intended as legal advice nor does it create an attorney-client relationship between De Leon Washburn & Ward, P.C. or its lawyers and any readers or recipients. Readers should consult an attorney of their own choosing to discuss how these matters relate to their individual circumstances.  Articles are not continuously updated, so information may become out-of-date.  Reproduction in whole or in part is prohibited without the express written consent of De Leon Washburn & Ward, P.C.