What is a Certificate of Tax Clearance?
If you are involved in the sale or purchase of a San Diego business, among the many documents that will be needed at the closing are various Certificates of Tax Clearance from various California and county taxing authorities. Here is a quick primer.
San Diego Corporate Law: What is a Certificate of Tax Clearance?
As the name suggests, a certificate of tax clearance is issued by a taxing authority stating that, as of a certain date, all taxes have been paid with respect to a business or person. Alternatively, the taxing authority will send notice that certain taxes are due and owing. The notice then serves the purpose of a payoff letter and it is expected that the taxes due and owing will be paid.
In the case of a sale of a San Diego business, the possible “taxing authority” are:
- California Tax Franchise Board — seller’s income taxes
- Board of Equalization — seller’s use and sale taxes
- Employment Development Department — employee withholding taxes
San Diego Corporate Law: When is a Certificate of Tax Clearance Needed?
In general, whenever you are selling a business – an asset purchase sale – you need certificates to show that all taxes have been paid. If a certificate is not obtained, the buyer can be held liable to pay the taxes under what is called “successor liability.” For example, see BOE information page here.
Furthermore, until a Certificate is obtained, the parties are legally obligated to hold back sufficient monies in a money escrow to cover any and all anticipated taxes. If a notice of taxes due has been received from the taxing authority, as a practical matter, the taxes are paid at the closing via an escrow mechanism and the deal will not technically considered finalized until all the tax clearance certificates arrive. However, if possible, the best practice is to have all the taxes paid and the certificates in hand before the closing.
San Diego Corporate Law: Timing?
In general, 60 days is the standard turn-around. Thus, no closing should be scheduled within that window of time unless an escrow is established with sufficient funds to cover any taxes due. However, failure to obtain a Certificate of Tax Clearance does not prevent the deal from closing. Rather, the deal can close, but the buyer is potentially at risk.
San Diego Corporate Law: A Notice of Bulk Sales Triggers Possible BOE Audit
If you are selling or buying assets, under some circumstances, you must prepare, publish, record and send a Notice of Bulk Sale. Depending on the circumstances, the Notice of Bulk Sale might trigger an audit from the BOE. Again, this will not prevent the asset purchase from closing, but the BOE audit might put the buyer at risk for any use or sales taxes that might have been due prior to the closing.
San Diego Corporate Law: County Tax Clearance Certificates
In addition to the tax clearance certificates from the Franchise Board, the Employment Development Department and the Board of Equalization, in some California counties, you need a tax clearance certificate from that county.
Buying a San Diego Business: Contact San Diego Corporate Law
For more information, contact experienced business attorney Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has many years of experience handling all aspects of the sale or purchase of businesses in San Diego and elsewhere in California including the need for tax clearances. Contact Mr. Leonard by email or by calling (858) 483-9200.