Posted on 05/20/2019 at 11:07 AM by Cody Edwards
The law regarding post-acquisition tax liability is thought, by most, to be well known:
- In a stock sale, taxes incurred by the acquired company remain with the company even after new ownership.
- In an asset sale, taxes incurred by the seller do not transfer to the asset buyer.
While this may be true for federal tax liabilities, it is not necessarily the case for state tax liabilities (I am sure it comes as a shock that state tax liabilities are often overlooked in M&A transactions). Indeed, many states, including Iowa, may impose on the asset purchaser liability incurred by the seller unless the purchaser takes certain steps.
In Iowa, a retailer who sells its business or stock of goods must prepare a final return and pay all sales and use tax. Iowa Code § 423.33. The purchaser of the business or stock of goods, as the immediate successor, is required to withhold from the purchase price a sufficient amount to pay any amount of delinquent tax, interest and penalty that is due from and unpaid by the seller. If the asset purchaser intentionally fails to withhold such amount, the asset purchaser is personally liable for the payment of seller’s delinquent taxes, penalties and interest, unless the asset purchaser made the purchase in good faith. Luckily, Iowa Code § 421.28 provides two good faith safe harbors.
GOOD FAITH SAFE HARBORS
Iowa Code § 421.28 provides purchasers with two good faith safe harbors, which, if either one is satisfied, precludes the asset purchaser from being held personally liable for the seller’s delinquent sales and use taxes:
- Requesting and receiving from the Iowa Department of Revenue a certified statement that no delinquent tax, interest, or penalty is unpaid by the seller; or
- Taking in good faith a certified statement from the seller that no delinquent tax, interest, or penalty is unpaid.
With respect to safe harbor #1, it is likely that the Department would only give such a certification after it was certain that no tax liability exists, which would likely require an audit of the seller by the Iowa Department of Revenue. For obvious reasons, this is not the purchaser’s and seller’s preferred method for satisfying the good faith requirement.
With respect to safe harbor #2, a statement in the purchase agreement that all taxes have been paid as of the date of closing is generally sufficient to be a “certified statement.” However, ensure the statement is clear that all taxes have been paid, rather than will be paid, and ensure that the definition of taxes includes sales and use taxes.
Although sales and use taxes are not typically considered in great detail in the sale and purchase of assets, the amount of taxes imposed, personally, on the buyer(s) can be significant. Buyers of assets should protect themselves from personal liability by availing themselves of one of the safe harbors outlined above.
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