When a business transfers, the existing debt of the business follows the business. Therefore, the seller must release the buyer from "successor liability". One of the agencies that the seller must contact for such a release is the State Board of Equalization ("BOE"). A Certificate of Payment must be issued by the BOE stating that the buyer is protected from successor liability. Without the Certificate, the BOE may hold the buyer responsible for the seller's unpaid taxes.
When using an escrow company, the Escrow Holder will handle obtaining the Certificate on seller’s behalf. We will send a written request to the BOE which includes the buyer and seller contact information and a copy of the fully executed escrow instructions.
Other requirements for issuance of the Certificate include, but are not limited to: FF&E list; allocation of consideration; verify the last day of business; buyer to obtain permit; sales tax on the fixtures and equipment; outstanding sales and use tax returns & payments; and the seller’s final return and payment. Since most of these are not done until the business actually transfers, the Certificate will not be received prior to the closing date. So now what happens? The Escrow Holder will close the escrow but, since we don’t know if the seller owes any taxes, we will retain the seller’s net proceeds, or a portion thereof, until the Certificate is received.
How long will THAT take? The BOE has 60 days from the date they receive all of the items stated above to issue either a Certificate of Payment (no amount is due from the seller and the buyer is released) or a Notice of Amounts Due and Conditional Release (an amount is due from the seller and the buyer will be released upon payment in full). If the latter is received, Escrow Holder will then pay the amount due from the funds held in escrow.
Unfortunately, there is no way to get around this. If the seller owes taxes, Escrow Holder must have funds to pay the amount due so that the buyer is not subject to successor liability. The longer it takes the seller to provide the required items to the BOE, the longer the funds sit in escrow while we await receipt of a Certificate.
Hint: when making payments to the BOE, use EFT or a cashier’s check. Sending a personal or business check will delay the issuance of the Certificate pending proof of check clearance.
About The Author: Darleen Sweet is with Central Escrow, Inc. (Orange County office) a financially independent, full service escrow company in Southern California. Darleen has been an escrow professional for 28 years, specializing in Bulk Sale, Liquor License Transfer, Hospitality and Commercial transactions for the past 16 years. Darleen can be reached direct at 949-733-0022 X103.
Posted on July 26, 2011 | 
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