When an entity is purchased (membership interest, stock, etc.) the entity generally retains all past liabilities, including any unsettled tax obligations. By purchasing the assets of a business the purchaser can avoid taking on some liabilities of the acquired business.
In Connecticut (and many other states) certain outstanding tax liabilities can follow a business even in an asset acquisition. The admissions and dues taxes, cigarette taxes, room occupancy taxes, sales and use taxes, tobacco products taxes, and Connecticut income tax withholding can all result in “successor liabilities” in Connecticut when all or substantially all of the assets of a business are acquired. This does not necessarily mean all or substantially all of the assets of a legal entity must be purchased, as a legal entity may have multiple lines of business and buying one of those lines of business could result in successor liabilities.
Buyers can, and usually should, have letters of indemnity from sellers and isolate liabilities from a newly acquired business in a separate legal entity. Buyers can also request a tax clearance certificate by filing Form AU-866. Form AU-866 is submitted to the Connecticut Department of Revenue Services (“DRS”) along with required attachments, such as a draft purchase contract. Once submitted the DRS will either issue appropriate tax clearance certificates or request that funds are put in escrow at closing to settle potential outstanding tax liabilities. This will occur within 60 days from submission. If the escrowed funds are remitted to the DRS after closing then appropriate tax clearance certificates will be issued and the seller can work with the DRS to have the escrowed funds released, removing the buyer from the process.
While not all buyers choose to file the Form AU-866, the benefits of filing the form should be seriously considered by buyers.