If you are buying a business in Florida, you will want to obtain tax clearance from the state to make sure you are not taking on the seller’s outstanding tax liability. Buyers often assume that if they acquire a business through an asset purchase as opposed to a stock sale then they will not be responsible for any of the seller’s unpaid taxes. However, most states have successor liability rules that allow the transfer of certain tax liability to the buyer even in an asset purchase. Often this type of successor liability is limited to sales and use tax and other excise taxes that a seller collects on behalf of the state.
Obtaining a tax clearance letter from the state is an important assurance for a buyer in an asset or a stock purchase that they are not taking on unpaid tax liabilities of the seller. In addition to obtaining tax clearance from the state, a buyer of a Florida business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.
Tax Clearance Letter (Certificate of Compliance)
The buyer of a Florida business can be held liable for any unpaid tax, interest, or penalties owed by the seller. The Florida Department of Revenue (DOR) issues two types of documents that provide proof that, as of a given point in time, a business does not have any outstanding tax audit assessment notices or unpaid taxes. One of these documents is the certificate of compliance and the other is a tax clearance letter. In most cases, it is the certificate of compliance that will be most relevant to the buyer of a Florida business, and that is the document covered here.
By obtaining a certificate of compliance from the seller, the buyer can have the significant assurance that there are no unpaid taxes for which the buyer will be held liable. However, the DOR also recommends that the buyer withhold enough money from the sale to cover any unpaid amounts. As an alternative approach, the DOR recommends that the buyer require the seller to hold enough money in an escrow account to cover unpaid amounts.
You can request a certificate of compliance online through Florida’s sunbiz.org website. You can also mail or fax your request. Only someone legally associated with the business, such as an owner, or someone who has been given a power of attorney by the business may request a certificate. That means that if you are the buyer, you will need the cooperation of the current business owner.
Requests must include all of the following information or else they will be rejected by the DOR:
- the business name, name of the requester (including signature), business address, telephone number, fax number, and email address
- an identification number (such as Business Partner Number, Federal Employer Identification Number, or Certificate of Registration Number, etc.)
- a copy of the driver license for the Power of Attorney or authorized agent (if applicable) registered with the Department of State (the picture ID must be readable or processing will be delayed)
- a properly executed Form DR-835, Power of Attorney, for a requester who is not the business owner.
The DOR responds to requests by email or phone call. Standard processing time is seven to ten business days. For more information, including access to forms, check the DOR’s tax clearance webpage.
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If you are buying a Florida business, you’ll also want to make sure the assets you are acquiring are not subject to any liens. You can do this by checking the state’s public records for creditor financing statements. This gives you notice of what secured debt you’ll be acquiring (if any) related to the business’s equipment, inventory, and possibly other items. You will want to do this whether you are buying the business in an asset or stock purchase.
Unlike most other states, Florida relies on a private, non-government service, Image API, Inc., for online UCC lien searches. Florida also has government-run sites where you can search for judgment liens (state court-ordered liens) and federal liens (such as federal tax liens).
If you are buying a business, there are other possible kinds of business debt not covered here that you might want to investigate, particularly in a stock acquisition. This could include, for example, unpaid local taxes, guarantees, or other private contractual obligations.
For all the essential information about buying or selling a business, get The Complete Guide to Buying a Business (ThelawQ.com) and The Complete Guide to Selling a Business (ThelawQ.com), both by Fred S. Steingold.
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