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New State Law on Transferee Liability Provides More Certainty

Published: May 18th, 2012

In the most recent legislative session, the Florida Legislature passed House Bill 103 (Chapter 2012-55, Laws of Florida), providing for new methods whereby a person acquiring a business may not assume the transferor’s state tax liabilities.  This change should add a higher degree of certainty in business sales and purchases regarding a buyer’s assumption of state tax liabilities.

Generally, a person who buys a business (the transferee) assumes the state tax liabilities of the seller (the transferor) unless an exception applies.  The buyer/transferee is required to assume the state tax liabilities of the transferor, irrespective of whether the sale is structured as an asset sale or stock sale.  Prior to the enactment of House Bill 103, a transferor/seller could obtain a certificate from the Department of Revenue (the “Department”) showing that the business does not owe state taxes, but only after the Department conducted an audit finding no liability for state taxes.  In our experience, the audit could be prohibitively time-consuming because there was no limit on how long the Department had to perform the audit.  Practitioners, therefore, generally dealt with potential state tax liabilities in the indemnification portion of the purchase and sale agreement and/or with cash escrows.

House Bill 103 merges the three existing transferee liability statutes (one was in sales tax, one was in communications services, and one was in the general state tax statute) into one (consolidating all three under the general state tax statute).  House Bill 103 also amends the exemptions from transferee liability.  As of April 6, 2012, the effective date of House Bill 103, a buyer of a business will have no transferee liability if:

(1) The transferor and the transferee do not have common insiders, the transferee may obtain a certificate of compliance from the Department showing that a transferor has not received notice of audit, has filed all required returns, and has paid the tax due from those returns; or

(2)  The transferee or transferor may request an audit of the transferor’s books and records, to be completed within 90 days by the Department, in order to find that a transferor is not liable for outstanding tax liabilities.

The first option above is a significant development, as it will allow many transferees (those without common insiders to the transferor) to have certainty regarding their potential liability.  As a practical matter, a certificate of compliance should be obtained in every business acquisition.

The Department has not yet released any information on how, practically, a certificate of compliance may be obtained.  We will continue to monitor any developments with respect to this new law and post updates as they become available.