What to do if I bought all inventory and fixtures from a business but was served papers notifying me that the seller has past sales taxes due and that I am responsible for paying them?

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What to do if I bought all inventory and fixtures from a business but was served papers notifying me that the seller has past sales taxes due and that I am responsible for paying them?

I now have the seller’s assets. In my contract it says that the seller holds the buyer harmless of all or any liabilities incurred prior to said sell of business. The seller said her attorney says I must still pay the seller and not comptroller because they are filing Chapter 11. However, the comptroller has informed me that if I do not comply, they will freeze all of my assets. What do I do?

Asked on January 15, 2014 under Business Law, Texas

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 7 years ago | Contributor

Retain an attorney to help you--tax law and determining proper tax liability can be complicated, all the more so if a party's Chapter 11 filing is thrown in, too.

As a general proposition,  your state does appear to impose sales tax liability on the buyer of a business, so you (or your corporation or LLC which bought the business, if you did not purchase it personally) may be liable for the sales tax. However, the indemnification or hold harmless provision you cite should require the seller to reimburse you for any liability; however again, that obligation may be worthless if the seller is insolvent or filing bankruptcy.

Also, it is possible that if the seller knew or reasonably should have known (i.e. any seller in her position would have known) of the sales tax liability and did not disclose it, that such nondisclosure may constitute fraud, providing a basis to rescind the transaction, or get your money back and return the business to her.

Therefore, there are many different legal issues at work here, which is why you should retain an attorney. On the other hand, if the amount at issue (the amout of sales tax) is too small to justify hiring a lawyer (e.g. just a few thousand dollars; say, less than $3k or so), you may be best off simply paying it, trying to recover it from the seller in small claims court, acting as your own attorney, and if you can't recover it, simply taking it as a business deduction or loss of some kind (speak with a tax professional).


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