Business Buyer Owes Tax Not Assessed Until After Purchase, Appeals Court Says

The Texas Third Court of Appeals held today in Agri-Plex Heating and Cooling, LLC v. Hegar that the purchaser of a business may be liable for Texas sales and use tax assessed against the business for the time before the purchase, even if the Texas Comptroller did not audit the business and assess the tax until after the purchase occurred.  This opinion further illuminates (and arguably expands) the Texas Tax Code’s successor liability laws, and highlights the importance of taking appropriate precautions when purchasing an existing business to avoid successor liability.  We discuss the opinion and its implications for Texas taxpayers below.

Background

Under certain circumstances, the Texas Tax Code allows the Texas Comptroller to hold the purchaser of a business liable for Texas taxes the business owes for periods prior to the purchase.  This is commonly known as “successor liability.” Under the law, if “a person who is liable for the payment of an amount” under the Texas Tax Code sells a business or the stock of goods of the business, the purchaser must “withhold an amount of the purchase price sufficient to pay the amount due until the seller provides a receipt from the comptroller showing that the amount has been paid or a certificate stating that no amount is due.” If the purchaser does not do this, the Texas Comptroller may hold the purchaser liable for this amount to the extent of the purchase price.  The statute provides that “a period of limitation during which the obligation of the purchaser under this section may be enforced begins when the former owner sells the business or stock of goods or when a determination is made against the former owner, whichever event occurs later.”

In the Agri-Plex case, at the time of the purchase, the Texas Comptroller had not assessed any tax against the business at the time of the purchase. The purchaser did not withhold any amount from the purchase price, nor did it request a receipt for taxes paid or a certificate of no tax due from the seller or the Texas Comptroller. Later, the Texas Comptroller audited the business for periods prior to the purchase and assessed Texas sales and use tax as a result. The Texas Comptroller then assessed this Texas sales and use tax against the purchaser under the successor liability law. The purchaser contested the assessment, arguing that the business was not liable for “an amount” to the Texas Comptroller at the time of purchase

The Decision

The Texas Third Court of Appeals upheld the trial court’s ruling that the purchaser was liable for the Texas sales and use tax assessed under the successor liability law.  In its memorandum opinion, the Texas Third Court of Appeals reviewed the language of the statute and its surrounding provisions and found the “amount” in the Texas successor liability statute “does not refer to an amount ascertained at the time of purchase, but to the amount of tax liability, which can be determined through the Comptroller’s tax audit after the purchase for taxes due up to four years before the purchase.”  It wrote that the plain language of the statute put the purchaser “on notice that a tax liability determination could be made after the purchase and the assessment could include taxes determined to be due up to four years before the purchase.”

Conclusion

We note that this decision is not currently final – the taxpayer may file a motion for rehearing and/or appeal the decision to the Texas Supreme Court.  However, this decision embodies the Comptroller’s current fairly aggressive successor liability policy.  Accordingly, those who purchase existing businesses or the assets of those business should recognize the possibility of successor liability, even if no assessment exists against the business at the time of purchase.  To avoid any possible successor liability, a purchaser may consider obtaining a certificate of no tax due or receipt of taxes paid.

Those who currently seek to purchase a business or the assets of a business or who have recently done so may wish to seek the advice of a Texas tax professional, such as a Texas tax attorney, to help determine whether they may be at risk of successor liability.


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