Texas Upholds Sales Tax Successor Liability Assessment in Sham Transaction

By: Michael Colavito, SALT Director

At a glance:

• The main takeaway: The Texas Comptroller upheld a sales tax assessment against the transferee of a business that was acquired for no consideration based on the state’s rule that imposes successor liability when a business is acquired through a fraudulent transfer or sham transaction.
• Assess the impact: This ruling serves as an important reminder to taxpayers acquiring businesses to understand the full scope of a state’s successor liability rules and the procedures that can relieve the purchaser from that liability.  
• Take the next step: Successor liability tax when acquiring and/or selling a business is complex and can vary state-by-state. Aprio’s State and Local Tax (SALT) team can help.

Schedule a free consultation today to learn more!

The full story

Most state tax laws include rules that grant the respective state broad authority to issue an assessment against a taxpayer when engaging in a transaction that lacks business purpose, economic substance, or is simply fraudulent in nature. Those rules may also apply to the successor of a business when such acquisition occurs through a fraudulent transfer or sham transaction, as illustrated buy a recent Texas Comptroller decision.[1]    

In this case, an administrative law judge (ALJ) was tasked with determining the validity of a sales tax assessment against a successor to a business that operated a restaurant. Although the Comptroller’s state’s assessment was not valid under the Texas’ successor liability rules, there was sufficient evidence to uphold the assessment based on the state’s ability to assess tax against those engaged in a sham or fraudulent transaction. 

A closer look at the case

In December 2019, the Comptroller issued a sales tax assessment to a business that operated a restaurant. The business, which was identified as “Company B” in the case, did not pay the assessment. A couple of months after the issuance of the assessment, the Taxpayer in the case, a separate business entity, was formed with the registered agent of that entity coincidentally being the son of the president of Company B. The Taxpayer’s registered address was the same address as Company B. The Taxpayer then registered an assumed name the same as Company B, and also submitted an application for a Texas sales tax permit in which it was stated that the Taxpayer would operate a restaurant at the same address as Company B. Further, there was no evidence to suggest that the restaurant business operated by Company B closed at any point or that there was any change to the operation of the business. Notably, the Taxpayer did not actually purchase Company B’s business – i.e., there was consideration exchanged between the Taxpayer and Company B.

In December 2020, the Comptroller assessed sales against the Taxpayer for “successor liability due to the acquisition of a previously owned business, Company B, with outstanding liabilities and/or the acquisition of a business through fraudulent transfers.” In other words, the Comptroller was assessing the sales tax against the Taxpayer that was previously assessed against Company B. This issue addressed by the ALJ was whether the assessment was valid under either Texas’s successor liability of fraudulent transfer or sham transaction rules. 

Successor liability rules

Similar to many states, Texas tax laws provide that if a person who is liable for state tax sells their business or the stock of goods of the business then the successor to the seller is required to withhold an amount from the purchase price sufficient to pay the amount of tax due, unless the seller provides the successor with either a receipt from the Comptroller showing that the tax has been paid or a tax clearance certificate.[2] If the successor fails to do so, it is liable for the sales tax liability of the seller to the extent of the value of the purchase price.

However, for the successor liability rules to apply, the law requires that some amount of consideration be paid by the acquiror to the seller. In this case, because there was no evidence that the Taxpayer paid any amount to Company B to acquire the restaurant business, the ALJ ruled that the assessment issued to the Taxpayer was invalid under Texas’ successor liability provision. 

Texas’s liability of fraudulent transfer or sham transaction rules

Texas law also provides that a person who acquires a business through a fraudulent transfer or a sham transaction is liable for any tax owed by the predecessor.[3] A fraudulent transfer or sham transaction is one that is made with intent to evade or prevent the collection of tax, penalty, or a transaction made without any consideration that is reasonably equivalent to the value of the business. Notably, under Texas’ fraudulent or sham transaction rule, the Comptroller is not required to show an intent to evade tax on the part of the taxpayer when no consideration is exchanged for the predecessor’s business.

Thus, given the facts in the case outlined above, the ALJ easily concluded that the Comptroller’s assessment was valid due to the transfer of the business from Company B to the Taxpayer being fraudulent or a sham.

The bottom line

The ALJ’s decision certainly serves as a potential warning to those contemplating engaging in a transaction intended to deceive a state tax authority. More importantly, given that most taxpayers are not engaging in such a transaction, the ruling also provides as a reminder to those purchasing a business to ensure it complies with a state’s successor liability rules. These rules are sometimes referred to as “bulk sales” rules, with the successor potentially having a withholding requirement or a requirement to timely notify the taxing authority of the impending transfer in order to avoid being liable for the transferor’s tax liability. 

Aprio’s SALT team has experience with successor liability or bulk sales tax rules. We regularly assist clients the with state tax aspects of acquiring and/or selling a business, including due diligence and structuring, to help ensure a transaction structure that will provide the most favorable state tax treatment. 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.

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[1] Texas Comptroller’s Decision No. 118,136, 10/24/2024.

[2] Texas Tax Code § 111.020.  Notably, and unlike most states, Texas’ successor liability tax rules apply generally to taxes imposed by the state, as opposed to just “trust fund” taxes, such as sales/use and withholding taxes.

[3] Texas Tax Code § 111.024.