Dothan and Wiregrass business owners looking to acquire another company should be aware of "successor liability," a legal principle that can make them responsible for the seller's unpaid sales tax, including interest and penalties, even if they were unaware of the debt. This issue often arises after a deal closes and state revenue departments initiate audits for businesses that have changed hands that no longer exist.
Most states with a sales tax allow the buyer of a business to inherit the seller’s unpaid sales tax unless the buyer follows a specific notification or clearance process ahead of closing. This liability applies to transactions such as sales of substantially all the assets of a business, a stock of goods sale, or a transfer of the major part of a business’s equipment. It exists because states would otherwise lose the ability to collect tax from a business simply because it changed hands.
The mechanism generally requires the seller to pay any taxes owed, and the buyer is expected to withhold sufficient funds from the purchase price until proof of payment has been shown. If the buyer opts to skip that step, they become personally liable for any unpaid amounts. This repayment is usually capped at the purchase price of the business. The liability extends beyond the tax itself to include interest and penalties that the seller faced, and it attaches regardless of whether a private purchase agreement states the seller retains responsibility.
States understand that successor liability rules can create unintentional traps for buyers and often provide a bulk sale notification or tax-clearance procedure for this exact situation. If followed properly before a deal closes, this process helps to limit or cap the buyer’s exposure. However, in most states, the buyer needs to invoke the procedure. For example, New York and Illinois require a buyer to notify the tax department at least 10 days before taking possession of assets or paying for them, whichever comes first. Washington State operates differently, where notice is filed after an acquisition, and the successor is only protected if the state does not issue an assessment against the former owner within six months.
Once a state is notified, it has its own clock for a response. California has 60 days, Texas gives its comptroller 90 days, and New York takes only five days. There is also a limit on the lookback period during which states can assess tax, which varies by state; the Multistate Tax Commission publishes a state-by-state reference guide. The average lookback period is three to four years, but voluntary disclosure agreement (VDA) lookbacks are shorter. However, sales tax that a business actually collected from customers but never remitted must be paid in full, regardless of how far back it goes.
To avoid inheriting these liabilities, businesses considering an acquisition should follow several diligence steps. First, establish exactly what is being acquired, in which states, and how the deal is structured, as asset-only deals generally trigger successor liability rules that stock deals do not. It is also important to list every state where the target has a "nexus," regardless of whether they are registered there.
Next, buyers should run a nexus study. This study will show where the target company should have been collecting and remitting sales tax based on factors like physical presence, economic thresholds, and marketplace rules. This step is critical for identifying the gap between states where tax was filed and states with exposure, allowing the buyer to understand the liabilities being inherited.
Third, aggregate the unfiled states to estimate the back tax, interest, and any applicable penalties for each. This figure should drive decisions on escrow sizing and remediation options before the purchase agreement is finalized. Once the previously unidentified exposure is mapped out, the buyer and seller must decide whether to resolve it before closing through a VDA or address it via escrow and indemnity. VDAs can be started anonymously and typically limit exposure on the lookback period, though they take more time.
Regardless of what a nexus study reveals, it is still the buyer's obligation to complete each state’s actual notification and clearance procedures. Many of these must be completed before closing the deal to effectively limit the buyer’s exposure.
