Was a buyer liable for a seller's unpaid Virginia use tax when it acquired the business assets without obtaining tax clearance or withholding funds?

Subject

Seller did not pay outstanding liabilities before selling business. New owner liable

Plain-English summary

A buyer acquired another company's business assets and was later assessed for use tax the seller had failed to remit before the acquisition. The buyer argued that the Department should collect from the former owner instead.

Virginia upheld successor liability. Va. Code § 58.1-629 required a seller to file a final return and pay outstanding sales and use tax within 15 days after selling or quitting the business. It also required a successor to withhold enough purchase money to cover the seller's unpaid tax, penalty, and interest unless the successor obtained a Department receipt or certificate showing the seller's tax status.

The buyer obtained no written certification from the Department and did not withhold the unpaid tax and interest. Its agreement instead contemplated using receivables and unbilled work in progress to retire the seller's current debt. Because the statutory safeguards were not followed, the buyer became personally liable for the former owner's unpaid assessment.

What this means for you

• A business-asset purchaser could inherit the seller's unpaid Virginia sales and use tax even though the liability arose before closing.
• The ruling identified two protective steps: obtain Department certification of the seller's tax status or withhold enough purchase money to cover unpaid liabilities.
• Private agreement terms about paying the seller's debts did not replace compliance with the statutory clearance and withholding requirements.

Citations and references

• Va. Code § 58.1-629, final return, purchase-money withholding, and purchaser liability.
• 23 VAC 10-210-3090, Department regulation interpreting successor liability.
• P.D. 99-297, similar successor-business liability determination.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-64

Original ruling text

May 10, 2007

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you seek correction of retail sales and use tax assessment issued to * (the "Taxpayer") for the period May 2002 through February 2004. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer acquired the business assets of another company ("Seller") on March 1, 2004. A subsequent audit revealed that tax had not been remitted on purchases made during the audit period (prior to the Taxpayer's acquisition of the Seller). The Taxpayer was assessed use taxes for that period. The Taxpayer contests such action, contending that any liability rests with the prior owner and the Department should seek payment from the prior owner.

DETERMINATION

Virginia Code § 58.1-629 provides that:

If any dealer liable for any tax, penalty, or interest levied hereunder sells out his business or stock of goods or quits the business, he shall make a final return and payment within fifteen days after the date of selling or quitting the business. His successors or assigns, if any, shall withhold sufficient of the purchase money to cover the amount of such taxes, penalties, and interest due and unpaid ... If the purchaser of a business or stock of goods fails to withhold the purchase money as above provided, he shall be personally liable for the payment of the taxes, penalties, and interest due and unpaid on account of the operation of the business by any former owner.

Virginia Code § 58.1-629 and Title 23 of the Virginia Administrative Code (VAC) 10-210-3090, which interprets Va. Code § 58.1-629, clearly require any dealer that sells out his business or stock of goods or who quits the business to file a final return and pay any outstanding liabilities to the Department. The successor business may request a receipt or certificate from the Department that shows if the seller of a business has any outstanding tax liabilities, or the successor business must withhold from the purchase money any unpaid liability. If this does not occur, the successor business becomes liable for any tax liabilities left unpaid by the former business owner.

In this instance, the agreement between the Taxpayer and the Seller clearly indicates in paragraph 1 that the Taxpayer agreed to reduce the liabilities held by the Seller. Furthermore, paragraph 1 of the agreement states that the Taxpayer will use a combination of receivables and unbilled work in progress to retire all current debt held by the Seller.

Based on the documentation and facts presented, it appears that the Taxpayer made no attempt to obtain written certification from the Department that the Seller had paid the outstanding liabilities prior to consummating the purchase of the business assets. In addition, the Taxpayer failed to withhold from the purchase money, the amount of tax and interest due from the Seller. As such, the Taxpayer failed to follow the requirements of Va. Code § 58.1-629 and Title 23 VAC 10-210-3090. This determination is consistent with Public Document 99-297 (11/15/99), which addresses a situation similar to that presented in this case.

Based on the above determination, the assessment is correct. An updated bill, with interest accrued to-date will be sent to the Taxpayer under separate cover. No further interest will accrue provided the bill is paid within 30 days of the date on the bill. The Taxpayer should remit its payment to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *.

The Code of Virginia and regulation sections cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this determination, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/56140i