In Tax Clearance Basics I discuss the importance of obtaining a tax clearance certificate when buying a business. I also provide instructions on how to obtain such a certificate in Missouri.
In short, when you buy a business, state taxing authorities can assess the seller’s unpaid state taxes against you. This is true even if your purchase agreement states that the seller is responsible for paying the taxes.
The good news is that many states have a process through which buyers can protect themselves. This is called tax clearance.
In Missouri, you can request a tax clearance certificate from the Department of Revenue by submitting Form 943. Once you submit the form, the DOR has 15 business days to either certify that the seller is in good standing or to inform you of the amount of taxes that are due. If you go through this process correctly, the state will not be able to assess the seller’s unpaid taxes against you.
The document that the DOR provides to certify that no taxes are due is called a “Certificate of Tax Clearance.” Occasionally, during the due diligence process when I’m representing a buyer, the seller will present to us a Certificate of No Tax Due. This certificate is also obtained from the DOR and it states that the seller doesn’t owe taxes. But it’s not the same as a Certificate of Tax Clearance.
A Certificate of Tax Clearance covers corporate income tax, sales tax, withholding tax, and employment security tax. More significantly, it serves as a safe harbor under the sections in the Missouri Revised Statutes that provide protection to buyers who obtain tax clearance certificates. In contrast, a Certificate of No Tax Due covers only withholding tax and sales tax. And it doesn’t provide the protection of a safe harbor. So I always advise my clients to obtain a full Certificate of Tax Clearance if at all possible.
Does it ever make sense to accept a Certificate of No Tax Due? Possibly, if you don’t have time to wait for a full tax clearance certificate and you have a lot of confidence that you won’t be hit with the seller’s taxes. You can obtain a Certificate of No Tax Due online immediately, so you can get some comfort without blowing your closing date.
But you should be aware that the two certificates are not the same and that you should obtain a full tax clearance certificate if you can. If the document presented to you (assuming you’re dealing with Missouri) does not say “Certificate of Tax Clearance” at the top, you’re not getting all the protection that’s available to you.