Buying a Business’s Assets? Don’t Ignore State Tax Successor Liability Issues

December 13, 2021

Business people Meeting negotiating a contract between two colleagues

By: Jess Johannesen, SALT Senior Manager

At a glance

  • The main takeaway: Thorough state tax due diligence and analysis are critical even if you’re only buying the assets of a company.
  • Impact on your business: If you let due diligence fall by the wayside, you could find yourself wrapped up in successor liability issues, which could trigger a wide range of risks even after the transaction has closed.
  • Get professional expertise: Contact Aprio’s State and Local Tax (SALT) team to identify state tax concerns in the purchase agreement and avoid unexpected successor liability tax assessments.

Schedule a free consultation today to learn more!

The full story:

In an asset purchase transaction, a buyer may not focus too much on the seller’s liabilities. Those liabilities (legal or otherwise) typically remain with the seller unless they are specifically assumed by the buyer in the agreement. However, for state tax purposes (typically sales/use tax and withholding tax),[1] regardless of the agreement’s provisions, a buyer may become liable for a seller’s pre-closing tax liabilities, whether or not they are known. This is commonly referred to as successor liability.

But what constitutes an asset purchase that will trigger successor liability? While that standard may differ among states, this recent Texas Comptroller’s Decision provides an illustration of how one state analyzes these transactions.[2]

The case in question

This case involved a skydiving business (the seller) that Texas audited for sales/use tax purposes, resulting in an assessment that remained unpaid. The petitioner (the buyer) in the case also operated a skydiving business at the same location as the seller’s business. The buyer and seller shared a few connections — the seller’s president owned the property where the buyer’s business operated, and the buyer’s owner was previously employed by the seller as an instructor.

The two parties entered into an asset purchase agreement. One draft of the agreement indicated that the buyer was purchasing all of the seller’s parachutes, equipment, customer lists, and any and all goodwill. This draft agreement also stated that the assets the buyer was selling constituted substantially all of the seller’s business.

During the case, the buyer contended that the terms changed and that the final, executed asset purchase agreement contained the same assets and purchase price, but that it made no reference to intangible assets or to the assets constituting substantially all of the seller’s business. In general, state successor liability provisions typically apply when substantially all of the assets are sold. As such, when Texas ultimately assessed the buyer for the seller’s outstanding sales/use tax liabilities, the buyer disputed that successor liability should be applied and argued that it did not purchase substantially all of the seller’s business, but instead it only purchased certain assets that were insufficient to operate a skydiving business.

Texas regulations provide that when determining if a “business” was sold, the state examines the transaction to determine what the parties intended to buy and sell. The regulations provide that it is possible to sell a “business” even when few assets are transferred.[3] In this case, the buyer started operating a skydiving business at the same location as the seller’s skydiving business, and the state noted that the number and types of assets acquired (coupled with the use of the seller’s business location) supported the conclusion that the seller transferred the business to the buyer. As such, the state held that the seller’s unpaid liabilities were properly assessed to the buyer as a successor.

Assessing for fraud

In addition to evaluating whether the “business” was transferred for purposes of successor liability, the state also looked at whether the sale of the assets constituted a fraudulent transfer or a sham transaction since, in those cases, the purchaser would be liable for any tax, penalty and interest owed by the seller.

In short, Texas defines a transfer as fraudulent or a sham transaction as occurring in cases where the transaction is intended to evade, hinder, delay or prevent the collection of tax or when reasonably equivalent value is not received in exchange for the business.[4] The state evaluates eight factors that are enumerated in the statutes to determine whether a transfer is fraudulent or a sham transaction.[5] In this case, the state identified that five of the eight factors applied to the transaction at issue (including, in part, the relationship between the buyer and seller, considering the fact that the buyer’s owner was a former employee of the seller; that the seller retained control of the assets as the buyer’s landlord with a lease to own the agreement on record; and that the seller had impending tax collection action for the outstanding sales/use tax audit assessment).

As a result, the state concluded that sufficient evidence established that the business transfer was fraudulent or a sham transaction, thereby supporting the assessment against the buyer pursuant to successor liability.

The bottom line

This case serves as an important reminder that successor liability issues need to be addressed even in the context of an asset purchase. Further, the case illustrates that successor liability provisions can even apply when only certain assets (and not substantially all assets) are transferred. Successor liability can be mitigated by conducting thorough state tax due diligence to identify potential exposures. In addition, some states have procedures that can relieve a buyer of successor liability (e.g., obtaining a tax clearance certificate).

Aprio’s SALT team has experience working with buyers to perform state tax due diligence in order to identify and address any potential state tax concerns in the asset purchase agreement so that buyers do not incur any unexpected successor liability tax assessments after the transaction has closed. In addition, our team works with sellers — typically in advance of a transaction — to help mitigate any potential state tax issues so that they can maximize the value of their business.

We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jess Johannesen, SALT Senior Manager, at or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This content was featured in the November/December 2021 SALT Newsletter.

[1] There are states where successor liability may apply to other taxes as well.

[2] Texas Comptroller’s Decision No. 115,982, 09/03/2021.

[3] Texas Admin. Code §3.7(d).

[4] Texas Tax Code Ann. §111.024(b).

[5] Texas Tax Code Ann. §111.024(c).


Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.