Successor Liable for Seller’s Tax Liability Incurred after Business was Sold

In Hearing No. 48,186, the Texas Comptroller of Public Accounts, through successor liability, assessed mixed beverage tax owed by a business on the purchaser of that business. The liability arose when the Comptroller audited the company after it sold its business to the petitioner.

Texas tax law, in Tax Code Section 111.020, provides that if a person who is liable for tax sells the business or the stock of goods or quits the business, the successor shall withhold an amount of the purchase price sufficient to pay the tax liability. A purchaser who fails to do so is liable for the amount due up to the value of the purchase price.

To avoid successor liability, the purchaser may request from the Comptroller a certificate that no tax is due.

At the hearing, Comptroller staff presented as evidence of successor liability the sales contract between the previous club and the petitioner. The contract provided the petitioner receive all rights, title and ownership of the previous club’s physical assets. The assets included cash registers, televisions, tables and bar stools, DJ sound equipment, a microwave oven, office furniture and equipment, glassware and other items used to mix and serve drinks and cleaning equipment (mops, brooms, mop bucket and supplies). In addition, the assets included alcoholic beverages listed on the ending inventory for the Texas Alcoholic Beverage Commission (TABC).

The petitioner contended that it cannot be held liable as a successor unless it used the business name of the original club. The petitioner’s president testified that the petitioner had no intent to open and operate a new club as the original club. He stated that the petitioner did intend to buy everything identified in the contract, but after the contract was signed, he discovered the original club did not own all the assets and had rented the tables, bar stools and furniture.

He also testified that the inventory list was prepared for TABC‘s benefit and the petitioner never received the alcoholic beverages on the list. The TABC prohibited the sale because the petitioner did not have a liquor permit at that time. When the petitioner obtained a permit and moved onto the premises, according to the president, the only alcoholic beverages left were a couple of bottles of beer.

While there was no request for a Certificate of No Tax Due, the president claimed he called the Comptroller’s office and was told that the original club had no outstanding liabilities.

When determining whether a business has been sold, Rule 3.7(d), relating to successor liability, provides that the Comptroller examines the transaction to determine what the parties intended to buy and sell. The answer in each situation will depend on the type of business involved, and a sale can occur even if a few assets are transferred.

The Comptroller may assess the successor of a business within four years from either the date the seller sells the business or the date the Comptroller’s assessment is made against the seller, whichever occurs later. See Tax Code Sections 111.020(e) and 111.201. Based on this period of limitation, Comptroller’s Hearing No. 27,579 had previously held that a successor can be held liable for a predecessor’s audit liability even though the predecessor was audited after the business was sold.

The administrative law judge ruled that the contract and the testimony of the petitioner’s president established “without a doubt that petitioner intended to purchase the entire business…” The judge continued, “Despite not receiving all assets that were included in the contract, petitioner did in fact acquire every item that [predecessor] actually owned at the club location… The continuation of a similar business at the same location using the entire assets, even if they are few, purchased from the predecessor, even under a different name, is sufficient for petitioner to be the successor under Tax Code Section 111.020.”

The administrative law judge recommended that the successor liability imposed against the night club be upheld but the amount assessed be reduced to the purchase price of the business. The Comptroller concurred.

*Originally published in Tax Policy News; a monthly newsletter about Texas tax policy at