What is successor liability?
Under Ohio law, you can be held liable for any outstanding sales tax liability of any business you acquire. This is known as successor liability. Ohio law requires that, during the acquisition process, you establish an escrow account. The escrow account should hold a sufficient amount of the purchase price to cover any outstanding debt. You should request that the seller provide a tax release certificate from the Department of Taxation before the escrow funds are released.
Successor liability is a judicially created doctrine arising under non-bankruptcy law; it is an exception to a common law rule. Generally, a purchaser of assets is not liable, absent agreement, for claims against the seller. Successor liability is the legal theory by which claims can be asserted against a buyer of assets—even though there is no express agreement to assume such liabilities. Successor liability is most frequently used to assert product liability claims. However, it has also been used to impose liability for mass tort and “future” claims, unpaid pension contributions, liability for environmental contamination, violations of minimum wage and overtime provisions of the Fair Labor Standards Act, violations of federal and state usury and lending laws and certain contract claims.
Many states, including Florida, impose an obligation to ensure that prior-year state taxes are not avoided through ownership change. States often have statutory authority to seek prior-period taxes from either the seller or buyer of the company. Often, the buyer is the owner of the company at the time of a state audit. As a result, that owner gets stuck with the tax bill. Some states have statutory authority to only impose successor liability for sales or use taxes, while other states have expanded their authority to include other business taxes. Therefore, it is imperative to perform a thorough review of any potential state tax obligation for multiple state business taxes before the transaction is completed. In many cases, a company may be in compliance for taxes in its home state but has failed to file for state taxes in other states. Many factors can lead to this situation.
Successor liability is the obligation of the purchaser (successor) to withhold a sufficient amount of the purchase price to cover any sales and use tax liability or admissions and dues tax liability of the seller until the seller (predecessor) produces a receipt from the Commissioner of Revenue Services showing that any tax liabilities have been paid or a certificate stating that no amount of tax is due. Under successor liability, the purchaser of a business is liable for the taxes of the previous owner to the extent of the purchase price of the business unless the purchaser obtains a tax clearance certificate from DRS. Successor liability applies where: • A person voluntarily sells a business; or • Transfers all or substantially all the assets of a business to one or more purchasers.
Under Ohio law, you can be held liable for any outstanding sales tax liability of any business you acquire. This is known as successor liability. Ohio law requires that, during the acquisition process, you establish an escrow account. The escrow account should hold a sufficient amount of the purchase price to cover any outstanding debt. You should request that the seller provide a tax release certificate from the Department of Taxation before the escrow funds are released. A tax release can be issued by the Department of Taxation when the business has been sold and the seller has filed the final sales tax?after: return (final return should be sent directly to the Central Office, Tax Release Unit. The Department has reviewed the seller’s?Group, with guaranteed funds); account and found that: a) all sales tax returns have been filed, b) all reported tax, interest and penalties have been paid, c) all filing and reporting requirements have been met.
