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Newsletter - Winter 2007
When Buying a Business, Due Diligence Pays
Carl Howden, Partner, Tax & Business Services |
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When acquiring a new business in Florida, potential buyers are faced with negotiations, contracts and myriad last-minute issues. One of the key things to do during this process is to investigate any direct or indirect sales or use tax liabilities of the seller.
This crucial step during the negotiating process is often overlooked, yet the ultimate responsibility for any sales or use tax liabilities can actually fall on the purchaser if not properly handled. The Florida Department of Revenue (DOR) rules are very strict in this area. The importance of taking a few steps to make sure all outstanding sales and use tax liabilities are paid cannot be emphasized enough.
Necessary Due Diligence
When a business or a stock of goods (inventory) is "sold out," the buyer must be made aware of any outstanding sales or use tax liability, up to and including the date of sale. The seller should provide the buyer with certification from the DOR showing any such liability outstanding. This amount should be withheld from the sales proceeds until the seller produces a receipt from the DOR that all outstanding sales and use tax liabilities have been paid. If the buyer fails to obtain this information from the seller or does not withhold a sufficient amount of the purchase funds, the buyer will be liable for the payment of the outstanding taxes, interest and penalties of the operation in question.
The seller should provide DOR certification at the closing, covering up to as close to the date of sale as possible. If the certificate does not cover the liability through the actual date of the sale, estimated withholding should be done, being conservative in the buyer's interest. Contract provisions can be made for immediate release of the funds upon delivery of the certification.
Buyers should determine if the rules related to business "sell outs" are applicable to their contemplated transaction. A business is usually considered "sold out" when the seller is exiting and no longer continuing in the previously conducted business in any way. But certain reorganizations and restructurings will also be considered by the DOR as "sold out" transactions. A sale is not considered "sold out" if it's a partial sale or if the sale is to multiple purchasers, none of whom purchases a majority of the business or its stock of goods.
Application for DOR Certification
The seller needs to file the necessary forms to receive clearance certification from the DOR. These forms should be filed with enough time for an issuance by the date of sale. The DOR will issue the certification showing amounts due, but it generally will require an audit of the seller's books in order to make its final determination and issue final certification as to liability.
Oftentimes, the seller will claim to be "clean" as to sales and use tax liability and will usually want full payment of the sales proceeds at closing. The seller may be unwilling to incur the expenses and time constraints of an audit of his books and records for sales and use tax liabilities. Alternatively, the seller may require the purchaser to pay the costs of any audit.
This is where the buyer needs to follow the rules closely, and the buyer's counsel must be aware of the rules to properly advise their clients and to make sure they are followed by the seller or otherwise negotiated. The DOR will be careful in issuing certifications, as they have limitations on future claims that can be made once they are issued, especially against the buyer.
Post Acquisition
If the rules for obtaining certifications of obligation are not followed in cases of "sell outs," both the seller and the buyer will share joint and several liability for sales and use taxes, interest and penalties, even for audits that may be done after the date of sale. In addition, keeping the required records for inspection by the DOR is also required for future audits. Thus, the buyer should put a clause in applicable "sell out" contracts for the seller to retain all records or for the purchaser to receive and preserve the records.
Conclusion
Due diligence is important during the acquisition process, especially when any direct or indirect sales or use tax liabilities are involved. Potential buyers should seek the counsel of professionals who are trained to help transactions run as smoothly as possible-and to help avoid unexpected financial consequences after the sale.
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