When a business is sold to an unrelated buyer, how long can the Comptroller go back to assess unpaid sales tax against the successor, and can the successor dispute a tax bill that was really the predecessor's fault?

Plain-English summary

Someone who bought a business from an unrelated seller asked about successor liability for that business's non-disclosed or underpaid Texas sales tax — specifically how long the Comptroller can go back for an audit, and whether the new owner (successor) can dispute a deficiency.

On the time limit: the Comptroller confirmed a four-year statute of limitations under Tex. Tax Code § 111.020(e), running from whichever is later — the date the predecessor was originally assessed, or the date the purchaser bought the business. (The letter also flags two administrative hearing precedents on this point, Hearings 33,109 (1995) and 30,162 (1993).) But that four-year clock has exceptions under § 111.205(a): the Comptroller can assess at any time, with no limitations period at all, if (1) the taxpayer filed a false or fraudulent report intending to evade tax, (2) no report was ever filed, or (3) the filed report contained a "gross error" — defined in § 111.205(b) as an amount due after correction that exceeds what was originally reported by at least 25%.

On disputing a deficiency: the letter confirms that a successor generally cannot challenge the correctness of a predecessor's already-final tax liability assessment, citing Administrative Hearings 22,992 (1989) and 35,696 (1998) as precedent.

What this means for you

Buyers of an existing business

Before closing, get clear documentation of the seller's sales tax history and any outstanding audits. As the successor, you can inherit exposure to the seller's unpaid tax going back up to four years from whichever is later — the original assessment date or your purchase date — and if the seller committed fraud, never filed, or grossly understated tax (25%+), there's effectively no time limit at all. You also generally can't fight the substance of a final assessment against the predecessor after the fact — your leverage is in due diligence before the purchase, not disputes after.

Sellers of a business

Resolve or disclose any tax exposure before selling — your successor inherits liability exposure and generally can't be your advocate in disputing an assessment against you after the sale.

Accountants and tax professionals handling business acquisitions

Flag the § 111.205 fraud/no-filing/gross-error exceptions specifically in due diligence — they remove the normal four-year ceiling entirely, so a seemingly time-barred liability may not actually be barred if any of those three conditions apply.

Common questions

Q: How far back can Texas assess unpaid sales tax against a business I bought?
A: Generally four years, running from whichever is later: the date the predecessor was assessed, or the date you bought the business.

Q: Is there ever no time limit at all?
A: Yes — under § 111.205(a), the Comptroller can assess at any time if the predecessor filed a fraudulent report to evade tax, never filed a report, or filed a report with a gross error (understating tax due by 25% or more).

Q: Can I, as the new owner, dispute the amount the Comptroller assessed against the previous owner?
A: Generally no. Administrative hearing precedent holds that successors cannot dispute the correctness of a predecessor's final liability assessment.

Q: Can I rely on this letter for my own business purchase?
A: No. This opinion is based on the facts presented, and additional or different facts could change the answer.

Citations and references

Statutes:

• Tex. Tax Code § 111.020(e) (successor liability limitations period — later of predecessor's assessment date or purchase date)
• Tex. Tax Code § 111.201 (general four-year limitations period)
• Tex. Tax Code § 111.205(a) (exceptions: fraud, no return filed, gross error)
• Tex. Tax Code § 111.205(b) (gross error defined as 25%+ understatement)

Administrative hearings cited: 33,109 (1995); 30,162 (1993); 22,992 (1989); 35,696 (1998)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200004201L

Original ruling text

April 17, 2000

Dear **:

Thank you for your recent letter concerning successor liability for
non-disclosed or underpaid sales taxes after a business entity is sold to a
non-related company.

Your understanding of current Texas Comptroller Policy is that a business
entity that is transferred remains liable for unpaid sales or use tax for the
forty-eight month (four year) statute of limitations. The statute runs from the
original purchase of the equipment or supplies for 48 months to the current
date.

You ask, if the transferred company were audited, would the 48 month statute
(barring extraordinary items) apply.

Response. The four-year limitations period runs from the date that the
predecessor was assessed, or the date that Petitioner purchased the business,
whichever occurs later, under Texas Tax Code 111.020(e). You may also wish to
review Administrative Hearings 33,109 (1995) and 30,162 (1993).

Also note that Section 111.205(a) includes the following exceptions to the
assessment period set forth in Section 111.201:

The limitation provided by Section 111.201 of this code does not apply and the
comptroller may assess a tax imposed by this title at any time if:

(1) with intent to evade the tax, the taxpayer files a false or fraudulent
report;
(2) no report for the tax has been filed; or
(3) information contained in the report of the tax contains a gross error.

Section 111.205(b) defines a gross error as a tax amount due after correction
that exceeds the amount initially reported by at least 25%.

You also ask if the transferred company would be allowed to protest any
deficiency that may develop from the audit.

Response. Several administrative hearings have held that successors cannot
dispute the correctness of a predecessor's final liability assessment. See
Administrative Hearings 22,992 (1989) and 35,696 (1998).

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Kevin Koller
Tax Policy Division