On January 19, 2017, the Texas Third Court of Appeals (the “Court”) in Agri-Plex Heating and Cooling, LLC v. Hegar found that a business buyer may not be able to escape successor liability for hidden tax liabilities assessed after the purchase occurs. Agri-Plex Heating and Cooling, LLC v. Hegar, No. 03-15-00813-CV (Tex. App.—Austin January 19, 2017, no pet. h.) (mem. op.)). As a result and moving forward, a buyer purchasing a business should be cautious and plan accordingly because it could be liable for taxes incurred by the seller before the purchase but not known or ascertainable by either party at the time of closing.
Under Texas Tax Code Section (“Section”) 111.020(b), a buyer of a business may be liable for taxes owed by the business prior to the sale up to the amount of the purchase price, also known as “successor liability.” A buyer wishing to ensure it will not be held liable for the business’ pre-sale taxes can: (1) withhold from the purchase price an amount sufficient to pay the taxes due until the seller provides a Texas Comptroller receipt for taxes paid or request a Texas Comptroller certificate of no tax due from the seller (Section 111.020(a)) or (2) request directly from the Texas Comptroller a certificate of no tax due or statement of the amount due (Section 111.020(c)). Section 111.020(e) provides that the period of limitation against the buyer for successor liability begins to run once the business is sold or when a determination is made against the seller, whichever event occurs later.
In Agri-Plex, the buyer purchased a business by buying all of the assets of a small heating and air conditioning company. At the time of the purchase, there were no outstanding sales tax liabilities for the business known by the seller, the buyer, or the Texas Comptroller. The buyer did not, under Section 111.020(a), withhold an amount from the purchase price and request a receipt for taxes paid or a certificate of no tax due from the seller. Nor did the buyer, under Section 111.020(c), request a certificate of no tax due or statement of the amount due directly from the Texas Comptroller. The Texas Comptroller later audited the business for sales tax covering a period prior to the sale and made an assessment against the buyer for taxes due to the extent of the purchase price.
The buyer in Agri-Plex contested the assessment by arguing it should not be held strictly liable for taxes of the business that were unknown and unascertainable at the time of closing. Specifically, the buyer focused on the word “amount,” which appears several times in Section 111.020. It argued that “amount” from the statute should be interpreted to mean the amount of fixed liability ascertainable at the time of the purchase and should not include amounts determined later. Unfortunately for the buyer, the Court noted that “amount” is interpreted to mean the amount of taxes ultimately determined. According to the Court, this would include amounts determined due by audit after the purchase for taxes due up to four years before the purchase.
The Court’s rationale in Agri-Plex for holding the taxpayer liable for pre-sale taxes was that the taxpayer assumed the risk of liability by not taking the available precautions from either Section 111.020(a) or Section 111.020(c) (discussed above). Further, the “plain language” of the statute under Section 111.020(e) (discussed above) put the buyer on notice that a tax liability determination could be made after the purchase and the assessment could include taxes determined to be due up to four years before the purchase.
The result of this decision is that the word “amount” under Section 111.020 has been interpreted to include an amount ultimately determined after the sale. This should cause concern for any taxpayer planning to purchase a business as it could be on the hook for hidden tax liabilities assessed after the purchase. Proper planning when purchasing a business should include the necessary due diligence to determine the types and extent of the tax liabilities owed by the seller as well as potential for audit by the Texas Comptroller. As the Court here made clear, the necessary due diligence should include either (1) requesting from the seller a receipt from the Texas Comptroller stating that the amount had been paid or a certificate stating that no amount was due or (2) requesting directly from the Texas Comptroller a certificate of no tax due or a statement of the amount required to be paid. Note that this decision is not yet final and is potentially subject to review by the Texas Supreme Court.
If Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P. can be of assistance to you with regard to any of these topics, please contact David E. Colmenero by phone or email at (214)749-2462 or firstname.lastname@example.org, Alex J. Pilawski via phone or by email at (214)749-2414 or email@example.com, or J. Daniel Boysen via phone or by email at (214)749-2413 or firstname.lastname@example.org. The focus of their practice is State Tax Planning and Litigation, and Tax Controversy.