Successor Liability and the Corresponding California Board of Equalization's Sales Tax Audit Policy

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Successor Liability and the Corresponding California Board of Equalization's Sales Tax Audit Policy

Date: 01/31/13

Topic: Sales Tax Audits

In the purchase or sale of a business it is common practice to conduct due diligence to guard against surprises such as off book liabilities. As part of the transaction a Tax Clearance Certificate should be requested from the State before closing. Before granting the request the Board of Equalization (BOE) will take a quick look at the business’s records for sales tax compliance. This is particularly true in so called “cash intensive” businesses such as restaurants, bars, garment industry, jewelry industry, etc. Although the release of liability against the buyer does not cut off the liability of the seller, often the easiest thing for the BOE to do is lien proceeds placed in escrow to ensure payment. Without the release of liability both buyer and seller can find themselves on the hook.

When the buyer of a business makes a written request for a sales tax clearance, the BOE must either issue the certificate of sales tax clearance or mail a notice to the buyer indicating the amount that must be paid as a condition of issuing the certificate. The liability of the successor or purchaser extends to amounts incurred with reference to the prior operation of the business. A BOE response to the written request is due within 60 days after receipt of the request, or within 60 days from the date on which the former owner’s records are made available for audit, or 60 days from the date of the sale of the business, whichever expires later.

The BOE maintains statistics for “industry averages” based on several factors and where there is significant deviation, they believe there is strong audit potential. Experience has shown that, where certain red flags go up, the BOE will place a 100% lien on proceeds placed in escrow. This hardship is meant to grab the taxpayer’s attention so that outstanding tax liabilities can be addressed and resolved before the transaction is completed. From the California’s perspective, if the issue is not remedied at the time of sale they will never collect any tax deficiency from the seller of the business. Absent a Tax Clearance Certificate, the buyer might find him or herself liable for the sellers yet to be determined tax liabilities associated with presale tax periods.

Hiring a tax attorney is a good idea because he or she knows how to navigate the complex tax laws as well as the government’s audit procedures and tactics. Moreover, a tax attorney will zealously advocate on your behalf, which means among other things he or she will seek to ensure that the government does not overstep its bounds by interpreting complex sales tax law to your disadvantage and prevent the government from making unfair assumptions about your business revenue. It is wrong for the SBE to overtax businesses simply because the California government needs the revenue. California is highly motivated to go after funds just sitting in escrow because it represents a proverbial treasure trove.

To learn more or seek assistance from the Tax Law Office of David W. Klasing see:

Audit Representation

California Sales Tax Audit Attorney

Sales Tax FAQ

Criminal Tax Representation