Buying a business is an exciting time and allows the new business owner to look forward to all of the great things that they hope to accomplish. In most cases, a buyer is not liable for the unpaid taxes of the seller unless the buyer expressly agrees to assume them. However, some states have enacted laws that potentially create liability for a buyer when they are purchasing more than half of the assets (i.e., personal property, equipment, inventory) of a business, and/or real estate. These dealings are often referred to as “bulk sales” transactions.
Generally, bulk sales laws aim to protect creditors (which can also include state governments) from fraud, protect buyers from incurring any tax liability of seller, and to prevent sellers from avoiding paying their outstanding liabilities. These laws often place an affirmative obligation on either the seller or buyer, or both, to provide notice to the state and possibly other creditors of a pending sale.
Many states have repealed bulk sales laws in whole or in part but have added successor liability statutes in their place. Similar to bulk sales laws, these laws require one party, or both parties to the purchase transaction, to provide notice to a state agency of its intent to close the acquisition. So as long as the parties provide the proper notice within the specified statutory timeframe, the buyer can be assured that any tax liability owed by the seller will not transfer onto the buyer or its assets. In some states, the agency will direct the parties to withhold a specified amount from seller’s proceeds of the purchase price until the agency can confirm any potential amounts owed, or the agency can issue a certificate stating that no taxes are owed. If a buyer fails to provide notice or follow the required steps before closing, some jurisdictions will transfer the seller’s outstanding obligations to the buyer and lien its assets, and also potentially create additional tax liabilities for the buyer.
While not complying with state bulk sales and successor liability laws can create practical challenges for a buyer, it may also create a lien priority issue for the buyer’s lender. One potential consequence of not complying with these laws is that the state can place a lien on these assets and the lender may no longer have a senior lien on its collateral. Another negative consequence would be that the buyer could now be responsible for taxes or liabilities incurred by the seller prior to the purchase, which could potentially negatively impact the buyer’s ability to repay its loan.
Because of these consequences and the diverse laws of different states, Lenders should familiarize themselves with the laws of the states where the purchase transactions are taking place or employ counsel to assist them in order to make sure they proceed compliantly to protect both the buyer and lender.
For more information regarding bulk sales and successor liability considerations in SBA lending, please reach out to Tim at firstname.lastname@example.org or 267-470-1223.