Last month I received an interesting case regarding an individual who received a levy notice from the State Board of Equalization. This levy was related to a liability against a corporation that was sold to another entity. As it turned out, the individual who received the levy notice was not an officer of either corporation, so the state backed off.

It does bring to mind, however, certain risks that buyers take on when purchasing a business. Generally, a purchaser of a business is considered a successor and inherits any tax liabilities of the predecessor. These tax liabilities may be known (for example, returns filed and not paid) or unknown - (an audit in process or not yet started).

In any event, it is the beginning of wisdom to advise buyers to obtain a tax clearance certificate from the State Board of Equalization. This process is usually handled by a competent escrow company experienced in business sales. The procedure, as outlined in regulation 1702, is to file a written request to the board for a certificate. The board will have 60 days to issue such certificate or a notice of the amount of tax, interest and penalties that must be paid or held in escrow as a condition of the certificate. The 60 day deadline starts with the later of:

1. When the request was made.

2. The date of the business sale.

3. The date the former owner's records are made available for audit.

If the board fails to issue either a certificate or a billing in that 60 day period, the successor will be relieved of any liability.

Another issue arises in the case of a former partner in a business who does not notify the State Board of Equalization of his departure. In this case the state can hold the former partner liable.

One last caveat is that the liability of a dissolved, abandoned, or terminated corporation could extend to any responsible person who willfully fails to pay or causes to be paid sales and/or use taxes due. A responsible person includes an officer, manager, employee, director, shareholder, or other person having control or supervision of the filing of returns. According to regulation 1702.5, personal liability shall apply if the board establishes that while the person was a responsible person, the corporation or limited liability company:

1. sold tangible personal property in the conduct of its business and collected sales tax reimbursement on the selling price (whether separately itemized or included in the selling price) and failed to remit such tax when due; or

2. consumed tangible personal property and failed to pay the applicable tax to the seller or the board; or

3. issued a receipt for use tax and failed to report and pay the tax

In summary, even though sales tax obligations are the primary liability of the seller, buyers of businesses can unknowingly assume that liability if they are not aware of the proper procedures to take.