The California Franchise Tax Board (FTB) recently issued a reminder that anyone acquiring the assets of a business also acquires the seller’s withholding tax liabilities. Thus, in order to avoid being held personally liable, the successor is advised to withhold in trust an amount of purchase price sufficient to cover tax liabilities and to follow clearance procedures to make sure that the full amount has been paid by the seller, or that no amount is due.
The taxes for which successors may be held liable include income taxes, employment taxes, and sales and use taxes. The FTB collects income taxes. The Employment Development Department (EDD) administers state employment taxes, and the State Board of Equalization (BOE) administers sales and use tax compliance.
A successor to a business should be cautious because the amount of the liability can be as high as the purchase price, and the requirements for successor liability are not clear. Therefore, successors are advised to follow withholding and clearance procedures as provided by the FTB, EDD, and BOE. Also, considering that the successor’s liability is limited to the fair market value of the assets acquired, the successor is advised to insist that the full purchase price (if the purchase price was fair market value) be retained in escrow until the clearances are received.
Who is a Successor?
Successors, for this purpose, include assigns, purchasers, heirs, distributees, and beneficiaries of any substantial portion of the assets or the business. A certain level of acquisition of assets is required to give rise to the acquisition of a business. The purchaser of the fixtures and equipment, for example, may not be a successor to a business. However, the meaning of “substantial portion” remains unclear, and there is no further guidance, or pronouncements from the FTB. Thus, when in doubt, purchasers are advised to follow the withholding and clearance procedures.
The Withholding and Clearance Procedures
FTB – income taxes
The purchaser can submit a written request to the FTB for a certificate showing the amount of taxes, interest, or penalties due by a seller. The FTB then has 60 days to issue the certificate, and the successor must pay the required amount within 30 days of issuance, or on the day the business or assets are acquired, whichever is later. If payment is not made by the due date, the buyer is subject to a 10% penalty. If the FTB does not issue the statement within the 60-day period, the FTB is deemed to have issued a certificate stating no withholding taxes, interest, or penalties due.
For the information that must be included in the written request, refer to the FTB website (https://www.ftb.ca.gov/professionals/taxnews/2013/May/Article_3.shtml)
EDD – employment taxes
The EDD also requires withholding of “sufficient” amounts to cover any employment tax liability. The maximum amount for which the purchaser can be held liable is the purchase price. A successor obtains a tax clearance from the EDD by filing Form DE 2220R, Release of Buyer Request Form. The EDD will issue Form DE 2220, Certificate of Release of Buyer. The EDD must issue the certificate within 30 days of the request. If the EDD fails to issue the certificate within 30 days, the buyer may not be held liable.
BOE-Sales or use taxes
The purchaser is also required to withhold sales taxes to cover a liability of the seller. Potentially, the buyer could be at risk for three times the purchase price. The purchaser is released from liability by filing a written request with the Board of Equalization. The Board must respond within 60 days, stating any amount due. If it fails to respond within 60 days, it is deemed to have issued a certificate, stating no amount due.
The Board does not provide a form for the purchaser to file. The Board only states that the purchaser should write to the Board and request a certificate of tax clearance.