Purchase of business may include sales tax liability

by Scott E. Seitter

for the Business Journal

You've hired a lawyer to assist you in the acquisition of a business. Your legal counsel carefully drafts the necessary documents, properly checks title to the real property, and searches state and county records for financing statements.

You think you've done the appropriate tax planning by acquiring the business assets, not shares of stock. Thus, you should eliminate the tax complications inherent in acquiring stock of a going concern and avoid assumption of any contingent liabilities by purchasing the assets directly.

You negotiate warranties and representations in the purchase contract in which the seller discloses no known liabilities. Your lawyer further attempts to limit your exposure for unknown liabilities by insisting the seller send bulk sale transfer notices to all creditors.

Title is clean and the financing statement searches come back with security interests of record against neither the seller nor the property. Closing takes place quickly and smoothly.

Unfortunately, you and your lawyer forgot one of the most unforgiving and often overlooked liabilities when purchasing a business.

Even though you will not acquire shares of stock in the existing business, the acquisition of the assets may subject a purchaser of assets to successor sales and use tax liability under Section 144.150 of the Revised Statutes of the State of Missouri.

The term "successor" refers to any "person" (defined in Section 144.010.1(6)) who, directly or indirectly, purchases or succeeds to the business or portions of the business or the whole or any part of the stock of goods, wares, merchandise or fixtures or any interest of a taxpayer quitting, selling out, exchanging or otherwise disposing of the business. The term "successor" also includes (for sales and use tax liability) any donee, heir, legatee, devisee or distributee.

Section 144.150, RSMO, was enacted for the express purpose of creating successor liability as to tax debts where it would not otherwise exist. Successor tax liability may be imposed despite reliance on the seller's representations, the state's failure to file notice or perfect any asserted lien against the business assets, and notwithstanding the issuance of bulk sale transfer notices.

In Gammaitoni vs. Director of Revenue, 786 S.W.2d 126 (Mo. Banc 1990), the Supreme Court of Missouri succinctly summarized the requirements and liabilities imposed by Section 144.150. "(S)uccessors to a business must withhold from the purchase price an amount sufficient to satisfy any sales taxes not paid by a previous owner, and the successor who fails to do so risks liability for the predecessor's delinquency."

The clear intent of Section 144.150 is to provide the state a mechanism to trace tax debts and such liability to the business, its assets or any portion of either. Moreover, since the court's first review, it broadly interprets the statute "so not to jeopardize the state interest in securing collection of taxes" this despite the court's inclination to narrowly interpret laws imposing taxes.

Practical considerations and conclusions. The combined effects of rulings in the successor tax liability area should leave attorneys and potential business purchasers in fear of hidden sales tax liabilities.

In my informal (and admittedly unscientific) poll of lawyers experienced in the area of selling and purchasing small to large businesses, a vast majority of practitioners are completely unaware of the tax liabilities imposed on purchasers under Section 144.150. To be aware of the successor tax liability statute and regulations is, at least, to be forewarned.

A review of the current status of the successor sales tax liability statute in Missouri and the court's application of the statutory terms and state regulations, as well as collection attempts, provides the following observations:

?First, Section 144.150 puts the onus of collecting delinquent sales tax for the state of Missouri squarely on the back of independent businesses.

?Second, these brave businesses must ascertain in each purchase transaction whether the seller may be pursuing a plan to quit or sell its business or stock of goods. The wary purchaser must not be misled. A crafty seller may attempt to "piecemeal" his quitting business sale to avoid triggering the withholding requirements of Section 144.150.

?Third, woe to the innocent purchaser who fails to realize the necessity of researching a seller's tax status. A purchaser's failure to withhold sufficient funds from the purchase price subjects the purchaser to successor tax liability. A liability is not limited by the amount of the consideration exchanged.

It is recommended that the buyer request from the Department of Revenue a statement of the seller's sales and use tax account in each and every instance where it appears the seller may be selling or quitting their business, and the seller does not have the financial wherewithal to meet any tax assessment. Such requests will undoubtedly slow down asset purchase transactions.

Moreover, a conservative purchaser should comply with the regulations and inform the director of the terms and specifics of the purchase prior to closing. Once again, the oft repeated caution "caveat emptor" rings true.

(©Scott E. Seitter, president of the firm of Levy and Craig PC, with offices in Kansas City and Gladstone, Mo., and Overland Park, Kan. The above article is an abridgement of an article that originally appeared in the January-February 1996 issue of the Journal of The Missouri Bar. This article was provided by the Missouri Bar Association.)