I just bought an existing business and now the Department of Taxation is coming after me from the business tax debt?

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Question: Help! I just bought a car dealership and almost as soon as I took over, I received a sales tax collection letter from the state department of taxation telling me that I owe sales tax. I haven’t really made any sales yet…what gives?

Response: When you buy an existing business, you buy many things of value: first and foremost, its built up goodwill or reputation, but also customer lists and relationships, inventory, any trademarks or other intellectual property, etc. But you also buy its existing state tax liability—states want to make sure they get their cut, and if that means taking it out of the otherwise innocent purchaser, so be it. When you buy an existing business, therefore, if the business owes an unpaid sales tax penalty from sales prior to your acquisition, you owe it now.

That’s why you should (1) check with the state before buying a business whether or not it owes any sales tax; and (2) withhold an amount from the purchase price sufficient to pay the taxes. (Some states even make these steps mandatory before you can actually close the sale.)

In your case, if you’ve already bought the dealership, it’s too late to check-and-withhold. You must pay any sales tax due. Your remedy is to sue the seller for the tax (and any other costs that come from paying it)—he or she had an obligation to disclose all the material or significant obligations and debts of the business prior to the sale, which clearly he or she did not.

For more information: you need to check with your own state’s department of taxation, but for illustrative examples of the rules from some very different states, see

Texas (http://www.window.state.tx.us/taxinfo/taxpubs/tx98_117.pdf)

Wisconsin (http://www.revenue.wi.gov/faqs/pcs/buying.html)

New York (http://www.tax.state.ny.us/sbc/buy.htm or http://www.tax.state.ny.us/pdf/publications/multi/pub20_1007.pdf).

Answered by Steven Zweig

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