Buying an existing business can bring unpaid taxes along with the equipment, customers, and inventory. Alabama’s sales tax law makes some buyers responsible for the seller’s unpaid taxes when the purchase price is not handled correctly. This post explains how that rule works and how buyers can protect a purchase.
Two Alabama statutes, Code sections 40-23-25 and 40-23-82, are known as the successor provisions. They apply when a business or its stock of goods is sold, and the Alabama Department of Revenue treats a new owner as responsible for a predecessor’s sales and use taxes.
Under Alabama Code section 40-23-25, the seller must file the required sales tax return within 30 days of the sale or closing, and the buyer must withhold enough of the purchase money to cover the seller’s unpaid taxes. That responsibility applies even when the buyer did not run the business when the taxes accrued.
Buyers should raise withholding with a Montgomery business acquisition lawyer before signing, since the purchase agreement can allocate the risk and set up an escrow. The agreement can also set a closing date that leaves time to obtain the receipt or certificate described below.
The buyer must keep the withheld money until the seller produces a Department of Revenue receipt showing the taxes were paid, or a certificate that no taxes are due. A buyer who fails to withhold becomes personally liable for the taxes that accrued and remain unpaid after the 30-day period. Withholding is not optional.
The exposure is not limited to large deals. A buyer of a small shop, restaurant, or service company can face the same rule, because the statute turns on the sale of a business or its stock of goods.
Taxes are one item on a longer list. Buyers also review what the business owes and what it has promised. A due diligence review commonly covers:
Which entity makes the purchase affects the buyer’s exposure, which is why owners also study how to avoid personal liability before closing. That choice can limit exposure to many ordinary business debts, though it does not replace the withholding step.
Setting up the buying entity is Montgomery business formation work that should be finished before the closing date. A new entity can also hold the acquired assets apart from the owner’s other property.
Asset purchases and stock purchases carry different risks. In an asset purchase, the buyer picks the assets and liabilities it assumes, although the successor tax rule still applies. In a stock purchase, the buyer takes the company with its full history.
A written agreement should state who owns each liability, what happens if an unexpected debt appears, and how much of the price stays in escrow. Sellers and buyers alike spend time on protecting business assets during these negotiations.
Disputes over what the seller promised often end up as Montgomery breach of contract claims. Clear representations and warranties in the agreement make those disputes easier to resolve.
A merger is another route, and Montgomery business merger transactions change how liabilities pass to the surviving company. Tax clearance and contract consents still need review.
Acquisitions involve tax, contract, and entity questions at the same time, so the order of the work matters. We usually start with the purchase price allocation and the withholding terms, then move to liens, leases, and employee matters.
At Bachus, Brom & Taylor, LLC, we have served Alabama clients for more than 20 years, and attorney Bryan M. Taylor’s background includes business law, civil litigation, and government contracting. In an acquisition, we review tax withholding, liens, and contract terms together.
Unpaid taxes are easier to resolve before a closing than after. Buyers planning a purchase in Montgomery can get in touch with a Montgomery business acquisition lawyer to build withholding and escrow terms into the agreement.
