CS-Responsible Parties-3 - How Tax Debt Follows a Business When Purchased (Successor)

Under Tennessee law, the purchaser of a business or stock of goods must withhold a sufficient amount of the purchase price to cover the seller’s unpaid sales taxes unless the seller gives the purchaser a receipt from the Department showing the taxes due have been paid, or the seller gives the purchaser a certificate from the Department saying that no taxes are due. If the purchaser fails to withhold the purchase money as described above, the purchaser shall be liable for the payment of the taxes.

A purchaser, acting in good faith, may also receive from the seller at the time of the purchase an affidavit stating under penalties of perjury the amount of taxes, interest, and penalty due and unpaid by the seller to the department through the date of the purchase, or a statement that there are no due and unpaid taxes, interest and penalty, and if the purchaser in good faith withholds and sets aside from the purchase money to be paid to the seller an amount sufficient to pay the amount of such taxes, interest and penalty shown to be due and unpaid in the seller's affidavit, and sends a copy of the seller's affidavit to the Collection Services division (formerly the tax enforcement division), shall be entitled to a release from the commissioner from any liability, in excess of that shown on the affidavit, for the payment of the taxes, interest, and penalty accrued and unpaid on account of the operation of the business by any former owner, unless the commissioner notifies the purchaser of the correct tax liability within fifteen (15) days of receipt of the affidavit.

If a purchaser fails to withhold funds as required, Tennessee’s successor statutes call for the seller’s existing tax debt to follow the business, its assets or any portion of them, and become a debt of both the purchaser and the seller. The law identifies a purchaser in this situation as a “successor.”

Specifically, purchasers can be held responsible for Tennessee Sales and Use taxes (SLC), Business taxes (BUS), and Liquor by the Drink taxes (LBD) as set forth in the respective code sections below.

 

Responsibility Type Tax Type TCA Section TCA Title
Successor SLC 67-6-513 Settlement on Quitting Business
Successor BUS 67-4-721 Final returns and payments; sale or termination of business
Successor LBD 57-4-303 Selling or quitting business; payment of taxes

 

Tenn. Code Ann. § 67-4-721 and § 57-4-303 read substantially the same regarding business tax and liquor by the drink tax, respectively.

Tenn. Code Ann. § 67-6-513 does not limit liability to just immediate successors. The statute’s language is broader and extends liability to successors of successors. Subsection (b)(1) talks about the liability of a dealer’s “successor, successors, or assigns” for the unpaid taxes arising from “the operation of [a] business by any former owner, owners or assigns.” This means that tax debt can follow a business or its assets through more than one successive sale.

Successor liability is joint and several, meaning that the Department can collect the full amount of unpaid tax liabilities from any successor. Thus, the involvement of another party does not limit the Department’s ability to collect the debt from either party.

Please Note: An audit of the seller following a sale could identify otherwise undisclosed tax liabilities of the seller to the detriment of the purchaser. Please see Article XXX for information on how purchasers can protect themselves when buying a business.

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