Alabama Sales Tax on Successor
Most states maintain some sort of successor liability provision in their tax statutes. Those provisions allow the state taxing authority to collect the seller’s outstanding sales tax liability from the purchaser in a sale if some requirements are not satisfied. It is advisable for prospective buyer and/or sellers to consult with an experienced Alabama tax attorney or CPA. Most states require that either the seller or the purchaser provide the state taxing authority with notice of the proposed asset sale. That affords the taxing authority the opportunity to review the seller’s sales tax history and to collect any outstanding debts before the seller closes up shop. Those provisions are designed to prohibit sellers from selling their assets and absconding with the proceeds before satisfying their sales tax debts. And they protect purchasers from the sales tax liability of unscrupulous sellers.
In Alabama, Code of Ala. 1975, section 40-23-25 provides as follows:
Any person subject to the provisions hereof who shall sell out his business or stock of goods, or shall quit a business, shall be required to make out the return provided for under '40-23-7 within 30 days after the date he sold out his business or stock of goods, or quit business and his successor in business shall be required to withhold sufficient of the purchase money to cover the amount of said taxes due and unpaid until such time as the former owner shall produce a receipt from the department of revenue showing that the taxes have been paid, or a certificate that no taxes are due. If the purchaser of a business or stock of goods shall fail to withhold purchase money as above provided the taxes shall be due and unpaid after the 30 day period allowed, he shall be personally liable for the payment of the taxes accrued and unpaid on account of the operation of the business by the former owner. If in such cases the department deems it necessary in order to collect the taxes due the state, it may make
a jeopardy assessment as herein provided. (emphasis added)
The Alabama Department of Revenue contends that the statute should be broadly interpreted so that a successor business must be held strictly liable for payment of its predecessor's tax liability. The Department believes that the actual passage of "purchase money" directly from the purchaser to the seller is not necessary for the successor to be liable under statute section 40-23-25. According to the Department of Revenue, a purchaser is under a duty to know if delinquent taxes are owed, and is liable if any taxes are left unpaid by the seller. The Department is also of the opinion that a successor's liability includes instances where money is not actually paid directly by the purchaser to the seller.
When buying a business, purchasers typically have two options available: 1) purchase the entity; or 2) purchase the assets. Back in law school, one of our old professors said that you have to be careful about purchasing an entity because you’re purchasing it ‘‘warts and all.’’ That meant that when buying an entity (for example, a stock purchase), the purchaser takes on all the entity’s liability. Consequently, there are many reasons why buyers would choose an asset purchase over an entity purchase. But as the provisions detailed above indicate, asset sales can result in transferred liability as well.
You know the old saying ‘‘Let the buyer beware?’’ Well, nowhere is that more true than in the case of an asset purchase. Though most buyers turn to asset purchases to limit successor liability, when it comes to sales taxes, they’re not afforded much relief. Luckily, most states provide mechanisms for definitively determining a seller’s sales tax liability before consummating the transaction. So buyers should take advantage. And sellers should be careful. Somewhere in the distance, a sales tax auditor is watching.