California Imposed Successor Liability on Purchaser of Restaurant Assets

March 25, 2020

When acquiring the assets of a business, be careful how the transaction is structured or you may be deemed to be a business successor that is liable for the predecessor’s sales taxes.

By Betsy Tuck, SALT Manager

Are you considering buying the assets of a business? Have you considered that you may be responsible for certain delinquent state taxes incurred by the prior owner? If not, you may be interested in a recent California Office of Tax Appeals (“OTA”) opinion regarding successor liability.[1]

What is successor liability? In the context of state taxes, most notably sales/use and payroll withholding taxes (i.e., “trust fund” taxes),[2] it refers to a purchaser of a business being held liable for any past-due taxes that the seller owed while the business was operated before the sale.  It permits the taxing authority to collect those delinquent taxes directly from the purchaser even though those delinquencies arose prior to the purchaser’s acquisition of the business.[3]

In California, as in most states, a purchaser can be relived from the successor liability provisions if it withholds from the purchase price an amount that is sufficient to cover the seller’s tax liability or the purchaser receives a certificate from the state showing that no tax is due or that the tax has been paid (these certificates are commonly referred to as “tax clearance certificates”).[4]

In this case, the taxpayer purchased the assets of restaurant known as the Oak Tree Diner for $50,000, and soon after opened a new restaurant, the Creekside Diner, at the same address. The purchaser applied for a seller’s permit and left blank the “Ownership and Organizational Changes” section of the permit application. The purchaser did not get tax clearance certification from the seller or withhold any taxes during the purchase. It was later determined that the owner of the Oak Tree Diner had unpaid sales and use tax liabilities and purchaser was assessed for payment of these liabilities.

The purchaser argued that she was not liable for the unpaid taxes primarily because she had bought only the assets of the business and not the business itself, as set forth in the purchase agreement.

In ruling against the purchaser and imposing successor liability, the OTA opinion focused on several facts that made it reasonable for the state to conclude that the purchaser acquired the business and not just the assets.

  • The purchase price, $50,000, was roughly double the value of the equipment as reported to the County Assessor’s Office for property tax purposes (this might indicate that some goodwill was acquired).
  • The purchaser retained the same phone number as the prior business.
  • The purchaser operated at the same business location and extended the same lease terms from the prior business.

The purchaser made several arguments against imposing successor liability, such as:

  • There was a period of time between the closing of the Oak Tree Diner and the opening of the Creekside Diner.
  • The interior of the restaurant was redone and the menu/concept changed (including that the Creekside Diner serves only breakfast and lunch, whereas the Oak Tree Diner also served dinner).
  • The reason why the value of assets reported for property tax purposes is only about half of the purchase price is due to an error in omitting certain assets from the property tax report.
  • Purchaser kept the same phone number because she was informed that she would not be able to get a new phone number with the same prefix, which is associated with a particular area, and she wanted potential customers to know that her restaurant was in that area.

Ultimately, the OTA found the purchaser’s arguments to be either unconvincing or lacking evidence.

If you are considering purchasing a business in the future, be aware of successor liability and that you may become responsible for the seller’s tax obligations.  Each state is different with regard to its successor rules and procedures required for a purchaser to be relieved of any obligations. Therefore, you should consider hiring a state tax advisor that will conduct due diligence on the target business and that will (i) advise if there are any issues with how the target business addressed its state tax compliance obligations, (ii) make recommendations for mitigating any tax risks, and (iii) assist with implementing those recommendations.

Aprio’s SALT team conducts due diligence on dozens of companies each year, and we will ensure that you understand the business, any potential state tax exposures, and how we will assist to mitigate those state tax risks.  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 Betsy Tuck, SALT manager, at or  Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the March 2020 SALT Newsletter.

[1] In the Matter of the Appeal of Julia Ellen Draper, OTA Case No. 18011840, December 23, 2019.

[2] There are a few states that extend successor liability to other taxes as well.

[3] The asset purchase agreement would typically provide a contractual remedy for the purchaser to be reimbursed by the seller.  Of course, that assumes the seller has the means to pay at the time the purchaser raises the contractual claim.

[4] Cal. Rev. & Tax Cd. § 6811; Cal. Code Regs. 1702.

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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