There are a lot of things about Florida sales tax that can sneak up and bite a business owner. Transferee liability is probably one of the sneakiest of them all. The concept surfaces when a business is sold or even when the business just shuts down – and it affects both the purchaser of the business as well as the seller. The article focuses on the ins and outs of Florida’s sales tax transferee liability law.
Everyone knows that when someone purchases the equity of a company (stock of a corporation, partnership interest in a partnership, or memberships interests in a limited liability company), that purchaser will be taking on the liabilities of that company. Sure, the buyer might build in some hefty indemnity clauses into the purchase agreement, but that still relies on the seller to still have the means to indemnify the purchaser. Most people believe, however, that when you purchase just the assets of a company, than the purchaser takes the assets only subject to any recorded liens directly on those assets. The belief is that the purchase completely avoids the whirlwind of potential liabilities out there for a business. That is true, for the most part, except for sales and use tax in Florida. That is where transferee liability law comes in.
Transferee Liability: The Buyer
Under Florida’s transferee liability law, the buyer (or buyers) of more than 50% of the assets of a business will be liable for the known and unknown sales and use tax liabilities of that business. Sec. 213.758(4)(a), F.S., provides:
A transferee, or a group of transferees acting in concert, of more than 50 percent of a business, assets of a business, or stock of goods of a business is liable for any unpaid tax owed by the transferor arising from the operation of that business…
What does this mean for a buyer and how does a buyer of a business protect themselves from transferee liability? In its simplest terms – buyer beware. A company that sells its assets might have existing sales tax liabilities from unpaid sales tax returns or a sales tax audit assessment. A small amount of due diligence on the part of the purchaser should be able to reveal these hazards. But even if neither of those situations are present, the selling company could end up getting a Florida sales and use tax audit notice AFTER the assets are sold. If the audit results in a sales tax assessment, then the buyer of those assets could become liable for the sales tax assessment against the closed company IF the seller doesn’t pay the liability. As crazy as it sounds, a buyer of the assets of a business could literally be lability for sales tax liabilities of the selling business that did not even exist at the time of the purchase of those assets. There is one caveat. The purchaser’s exposure is limited to the purchase price of the assets. But theoretically having to pay 100% extra for the assets would turn almost any profitability calculation on its head. Not much of a caveat! The next section discusses the best way for the buyer to protect themselves (besides a huge escrow at closing).
Transferee Liability Protection – The Buyer
The ridiculousness of transferee liability laws and the chilling effect it can have on the sale of a business has not escaped the attention of the Florida legislature. Around 2011, Florida enacted Sec. 213.758(4)(a)1.a., F.S., allowing for a transferor of assets of a business to request a “Certificate of Compliance” to make the purchaser immune from the sales and use tax liabilities of the selling business IF the following are all true:
- The seller is not under Florida sales and use tax audit
- The seller has filed all required sales tax returns and paid the tax on those returns
- There were no insiders in common between the transferor and the transferee at the time of the transferee.
With a Certificate of Compliance in hand, the buyer of a business OR more than 50% of the assets of a business can take the business/assets free and clear of sales tax liabilities. I would advise ANY buyer to get a certificate of compliance before completing the purchase business of any business in Florida. The parties should be aware that there is one downside to getting a certificate of compliance which it is a giant “audit me now” notice to the Florida Department of Revenue for the selling entity. While it is not guaranteed the seller will be audited, it is definitely the last chance the Department will have to audit the closed business. The huge plus for the seller in getting a Certificate of Compliance is that they buyer should not require a huge 3 year escrow for potential sales tax liabilities.
Transferee Liability: The Seller
The biggest impact transferee liability can have on someone selling a business is the large escrow’s an educated buyer will require to account for the potential sales tax exposure of buying the business or assets. The Certificate of Compliance should alleviate the need for sales tax driven escrows. However, from the seller’s point of view, there is still the potential sales tax exposure if the business is audited AFTER the sale, which does happen quite often. What is probably the most effective solution to mitigate this risk to the seller is to do an analysis of the sales tax exposure of the business, then do a voluntary disclosure of those tax liabilities with the Florida Department of Revenue. The voluntary disclosure is dramatically less time consuming and expensive than an audit and it allows the taxpayer to get the exposure taken care of right around the time of the closing of the business. The chance of getting a sales tax audit after doing a voluntary disclosure in this scenario is almost nil. Well worth the effort.
Transferee Liability: Shutting Down a Business
For the business owner who is considering shutting down the business without selling the business or its assets (or even distributing the assets to the owner), then the transferee liability statute impacts this scenario as well. Specifically, sec. 213.758(2), F.S. provides:
A taxpayer engaged in a business who is liable for any tax arising from the operation of that business and who quits the business without the benefit of a purchaser, successor, or assignee, or without transferring the business, assets of the business, or stock of goods of a business to a transferee, must file a final return for the business and make full payment of all taxes arising from the operation of that business within 15 days after quitting the business. The Department of Legal Affairs may seek an injunction at the request of the department to prevent further business activity of a taxpayer who fails to file a final return and make payment of the taxes associated with the operation of the business until such taxes are paid. A temporary injunction enjoining further business activity shall be granted by a circuit court if the department has provided at least 20 days’ prior written notice to the taxpayer.
This statute gives the Department the power to stop a business owner who shuts down a business without cleaning up its sales tax problems from starting another business without paying all the taxes of the prior business that closed. This includes not only the taxes for the final sales tax return of the business, but also the taxes that might arise from an audit of the business after it closes (something a voluntary disclosure will likely avoid).
One other thing I see quite often with a business that closes is that the owner forgets to officially turn off the business’s sales tax account with the Florida Department of Revenue. With the sales tax account still open, the Department of Revenue’s computer system will presume that the business is still operating and will estimate the sales and tax liability of the company for many additional months – then start aggressive sales tax collection activity on the owner. So, officially closing the sales tax account is very important. Of note, simply telling someone at the FL DOR that you are closing the business does not work. You must log in to your sales tax account and close it online.
Transferee Liability – Conclusion
Transferee liability is just one of those “sneak up and bite you” statutes that most business owners have no idea is out there. Not even all business brokers are aware of transferee liability or how buyers/sellers can protect themselves. If you are buying, selling, or even thinking about shutting down and business and want to discuss the sales tax implications, then give me a call for a free initial consultation. We have help dozens of business on both the buyer’s and seller’s side of the transaction get the sales taxes cleaned up during the sale of a business.
About the Author: James Sutton is a Florida licensed CPA and attorney as well as a partner in Moffa, Sutton, & Donnini, PA. Mr. Sutton is charge of the Tampa office of the firm and practices almost exclusively in the area of Florida Sales & Use Tax Controversy. Mr. Sutton handles audits, protest, litigation, criminal cases, revocations, collections, and consulting engagements all in the area of sales tax. Mr. Sutton is an active member in the FICPA, AICPA, AAA-CPA, and FIADA. Mr. Sutton is also the State and Local Tax Chairman for the AAA-CPA and past president of the Florida AAA-CPA. For 2022 to 2024, Mr Sutton was the Chairman for the State Tax Committee for the FICPA. Otherwise, you can learn more about Mr. Sutton in his firm bio HERE and you call him directly at 813-775-2131 or email JamesSutton@FloridaSalesTax.com
About the Firm: At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We even have former sales tax auditors on staff. We represent taxpayers and business owners from the entire state of Florida. Contact us for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
ADDITIONAL RESOURCES
FL SALES TAX AUDIT – FROM AUDIT NOTICE (DR-840) TO NOPA, published September 17, 2023, by Matthew Parker, Esq.
FLORIDA SALES TAX AUDIT HELP, published January 8, 2025, by James H. Sutton, CPA, Esq.
FLORIDA SALES TAX AUDITS PROCESS AND TRAPS, published March 4, 2023, by David Brennan, Esq.
DON’T HIRE AN IRS ATTORNEY FOR SALES TAX PROBLEMS!, published July 17, 2024, by James Sutton, CPA, Esq.
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