Business buyers often fail to put
enough time and effort into doing
proper due diligence. But now, in Georgia, that could cost them.
A new ruling by the Georgia Supreme
Court can leave a purchaser responsible
for the seller’s delinquent sales taxes.
Michael S. Evans, attorney at law with
Baker, Donelson, Bearman, Caldwell and
Berkowitz PC in Atlanta, says there are
things a business can do to avoid this.
Smart Business spoke with Evans about
the new law and how a purchaser can
avoid “getting stuck holding the bag.”
The Georgia Supreme Court recently made
an important ruling regarding the purchase
of a business. What was it?
The Georgia Supreme Court ruled on
June 4, 2007, in the tax case of JD Design
Group Inc. versus Graham, that the purchaser of substantially all of the assets of a
business was liable as a successor in interest for delinquent Georgia sales taxes
owed by the seller. In that case, the purchaser agreed to buy substantially all of the
assets of the seller’s business, including
real estate used in the business. The purchaser later assigned the right to buy the
real estate to its sole shareholder. Although
the seller represented in the purchase
agreement that all of its taxes had been
paid, and the purchaser’s title search on the
real estate didn’t show any liens, the purchaser didn’t require that the seller obtain a
tax clearance letter from the Georgia Department of Revenue certifying that the
seller had no unpaid taxes.
The purchaser would come to regret that
decision several months later when the
Department of Revenue sent the buyer an
official assessment and demanded payment for almost $25,000 of the seller’s outstanding taxes. They later sent an additional assessment for almost $7,000 more.
Georgia law has long provided that the
purchaser of a business must withhold a
sufficient amount of the purchase money
to cover the business’s unpaid sales taxes
until the seller provides either a receipt
from the Department of Revenue showing
that all taxes (including interest and penalties) have been paid or a certificate from
the Department of Revenue showing that
no sales tax is due. A purchaser who fails to withhold purchase money until receiving either a receipt or a tax-clearance certificate is liable for the seller’s unpaid sales
tax, including interest and penalties, to the
extent of the purchase price. Failure to
comply with this successor liability statute
can also result in a misdemeanor charge.
The purchaser challenged the tax assessment on the grounds that it wasn’t a successor to the seller because it didn’t buy all
of its assets (since the purchaser’s shareholder bought the real estate) and was just
an innocent purchaser for value, and the
Department of Revenue’s failure to record
a lien should bar it from imposing liability
beyond the original party. The Georgia
Supreme Court wasn’t persuaded by any of
those arguments, though, holding that the
successor liability statute applies to sales
of less than all of a business’s assets and
that the purchaser could have protected
itself by complying with its affirmative duty
to get a tax-clearance certificate.
What do buyers of a business need to do to
avoid ‘getting stuck holding the bag’?
The JD Design case should remind buyers to require in their purchase agreements
that the seller provide a tax-clearance letter as a condition of closing. Buyers should also include tax indemnities in the purchase agreement requiring the seller to indemnify the buyer against any successor
tax liability, though that may not help if the
seller spends all of the purchase money.
How is the Department of Revenue involved
in such a transaction?
Although the Department of Revenue can
pursue the buyer directly without trying to
collect delinquent taxes from the seller, it
will typically get involved when it tries to
collect from the seller and learns that the
seller has sold its business and doesn’t
have enough money to pay the taxes.
Does a company have any legal options to
pursue if it doesn’t get a tax-clearance letter?
The buyer is required to withhold a portion of the purchase price sufficient to
cover the seller’s outstanding taxes, interest and penalties. If the buyer doesn’t withhold and doesn’t have a tax-clearance letter, then its options are pretty limited.
What other things should individuals be
aware of when purchasing a business?
Business buyers often fail to put enough
time and effort into doing proper due diligence. They should remember that a thorough investigation prior to buying the business can save them a lot of headaches
down the road, and that the seller’s creditors may not be prevented from recovering
from the buyer just because the buyer pays
fair market value for the seller’s assets. One
common method of providing some protection for the buyer is to set aside a portion of the purchase price in an escrow
account at closing. The funds can be held
in escrow for six to 12 months or more and
provide a means to cover indemnification
obligations of the seller during the escrow
period, so the buyer doesn’t have to worry
that the seller will take off with the purchase money and leave the buyer holding
the bag. If no claims are made during the
escrow period, then the seller will normally get the escrowed funds.
MICHAEL S. EVANS is an attorney at law with Baker, Donelson,
Bearman, Caldwell and Berkowitz PC in Atlanta. Reach him at
(404) 221-6517 or [email protected].