How to Get a Tax Clearance Certificate

When buying a business, learn first how to avoid assuming the seller’s tax liability.

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If you're trying to close or sell your business, you might come across the requirement to obtain a tax clearance certificate. Each state has its own requirements for how you can get the document and when you might need it. While you should always check your state's rules, you can follow this general guidance on tax clearance certificates.

• What Is a Tax Clearance Certificate?
• When Do You Need a Tax Clearance Certificate?
• Deciding What Tax Information You Need
• How to Get a Tax Clearance Certificate
• What You Need to Request a Certificate
• More Questions to Ask
• What About Liens?
• Getting a Tax Clearance Certificate in Your State

What Is a Tax Clearance Certificate?

A tax clearance certificate is a document issued by a state government agency, usually the department of revenue. It certifies that a business or individual has met their tax obligations as of a certain date. The IRS also issues tax clearance certificates in certain situations, such as applications for federal contracts.

Tax clearance certificates might also be called "tax clearance letters," "tax status certificates or letters," "certificates or letters of compliance or tax compliance," or "letters or certificates of good standing."

Depending on the laws and requirements of each state, the taxes covered in a clearance certificate for a business could include:

• sales tax
• use tax
• franchise or corporate tax
• unemployment tax, and
• other types of taxes.

When Do You Need a Tax Clearance Certificate?

Many states have what's called successor's liability laws, which mean that you can be held responsible for unpaid taxes even though the taxes were incurred by a former owner. States might require business owners to obtain a tax clearance certificate when they close or sell their business, but to protect your interests, you, the buyer, should obtain a tax clearance even if it's not legally required.

If you're expanding your business from your home state into a new state, you might find that the new state requires a certificate. The same might be true if you're applying for a business loan or government contract.

Most states require you to register your business, usually with the secretary of state. Getting a tax clearance doesn't eliminate the need to register the business you're purchasing.

Deciding What Tax Information You Need

If you're buying a business, you'll first need to know the types of taxes levied on the business you're buying. Some states will search all tax databases to fulfill a tax clearance request, but others will ask you to state the types of taxes you want to include in the search. The types of tax liabilities you should check for include:

• sales and use taxes
• gross receipts taxes
• excise taxes
• franchise or corporation taxes
• special taxes like gaming, liquor, and fuel
• employment taxes like unemployment insurance and withholding taxes

Some states levy permit and license fees and you'll want to be certain the seller is up to date on those taxes as well.

How to Get a Tax Clearance Certificate

In most states, the department of revenue will issue a tax clearance certificate; but in others, it might be the department of taxation, department of finance, secretary of state, or another agency. Many states provide forms for requesting a tax clearance online. Others require you to submit a written request.

Refer to the 50-state table for the agency that issues tax clearance certificates in your state. The procedures for getting a certificate vary widely from one state to the next, and the procedure depends on the type of business entity, the industry, and the location within the state. It's a good idea to check directly with the state agency responsible for issuing clearances before submitting your application to learn exactly what the certificate will cover.

Some state revenue and taxation agencies include employment taxes, such as unemployment tax and withholding tax, in their search to determine whether a seller has any outstanding tax liabilities. But in other states, you might need to request employment tax information separately from the Department of Labor or a similar agency.

Local governments, including counties and cities, might also levy taxes. You might have to contact the taxing agency in the local area where your business is located to determine whether a seller is up to date on those taxes.

What You Need to Request a Certificate

In general, you'll need to supply the following information to get a tax clearance certificate:

• the name, address, and phone number of the buyer and seller
• a business address or addresses if multiple locations are involved
• the date of sale
• a bill of sale or purchase agreement for the business
• the tax and employer identification numbers for the seller and buyer, and
• escrow company information, if one was involved.

More Questions to Ask

Which taxes are subject to the successor's liability rules? As explained above, most states hold the buyer of a business responsible for the seller's unpaid taxes. The type of taxes (such as sales and use tax) that are subject to those laws varies by state.

Does the state require you to withhold funds to cover unpaid taxes? Many states require the buyer to withhold enough funds to cover the seller's unpaid taxes, along with interest and penalties. Unfair as it might seem, buyers might be charged a penalty if they fail to set aside those funds.

Does the state impose requirements for closing a business? Some states require business owners to file a formal notification when they close or sell their business. This notification alerts the state to check for unpaid taxes. Buyers in these states should request a copy of the close or sale notice, especially if the state uses the notice in lieu of issuing a clearance certificate. Some states offer the option of verifying the closure through the state's website. If the seller does not file a required notification and owes taxes, the state might come after the buyer for payment.

Will the state issue a tax clearance to the buyer? Typically, the seller applies for the tax clearance, but some states allow the buyer to apply for it. Other states will issue a tax clearance only to the seller, and you'll have to work with the seller to get a copy. Others allow the buyer to receive a copy of the tax clearance directly if the seller provides written authorization.

Will you need a separate tax clearance for multiple locations of a business? If the business you are buying has more than one location, you might need a separate clearance for each location.

Does the agency issue clearances when the seller has a payment plan in place? In some states, a tax clearance might not mean that the seller has no unpaid taxes, but rather that the seller has arranged a payment plan to pay the taxes. It's important to understand your rights if the seller doesn't live up to the payment plan in the future.

What About Liens?

A lien allows a creditor to legally take a borrower's property or assets if a loan that is secured by property goes unpaid. The lien "sticks" to the property, no matter who owns it. To avoid the specter of losing your newly acquired property to the seller's lender, make sure that the assets you are acquiring are not subject to any liens.

In most cases, you can do a Uniform Commercial Code (UCC) public search on the website of the secretary of state to determine if someone has placed a lien against the property you're purchasing. This search gives you notice of what secured debt you'll be acquiring (if any) related to the business's equipment, inventory, and other items. You'll want to do this whether you're buying the business in an asset purchase (where you own the property of the business) or a stock purchase (where you own the business entity and the entity owns the property.)

It's also a good idea to investigate other kinds of business debt, such as guarantees and other private contractual obligations.

Getting a Tax Clearance Certificate in Your State