Here at Miles Consulting Group, we understand how critical it is for companies negotiating mergers and acquisitions (M&A) to stay ahead of complex tax obligations, including successor liability. When acquiring a business, there are tax liabilities that should be considered during the due diligence process, yet buyers often overlook these and are caught off guard after the purchase. They can then face unexpected, and sometimes hefty, financial penalties as a result.

Our aim with this article is to help buyers understand the tax obligations of M&A, the liability risks of different types of acquisition, how tax liabilities differ between states, and finally, how buyers can mitigate the risks associated with sales tax and successor liability.

What is successor liability in M&A?

 Successor liability refers to the legal principle that holds a buyer responsible for a seller’s outstanding obligations, such as unpaid sales tax, following the acquisition of a business. When a business is acquired, there is a risk that the buyer could become responsible for the seller’s unpaid sales tax obligations. This liability can arise regardless of whether the transaction is structured as an asset purchase or a stock/equity purchase, and it should be a critical area of focus during due diligence. Successor liability can include unpaid back taxes, penalties, environmental violations, and interest if the seller failed to remit sales tax properly. If you’re not protected against successor liability when you acquire a business, you may face audits, financial penalties or lawsuits.

What triggers successor liability during a business acquisition?

Failure to obtain a tax clearance certificate or bulk sales release: Many states require sellers to obtain a clearance certificate before transferring assets. *Without it, you may be liable for unpaid sales taxes. This is an area that we frequently see tripping people up. Most states require that at minimum, you notify the state at least 10 – 30 days before a sale. They may also request bank information where the escrow account will be held and/or an affidavit from the seller that there is no tax due to the state.

De facto merger or continuation: When a deal functions like a merger in substance, or when the buyer effectively carries forward the seller’s business with the same operations, staff or leadership, courts may deem it a continuation and impose successor liability.

Express or implied assumption of liability: When a purchase agreement explicitly states, or it can be reasonably interpreted, that the buyer accepts specific obligations, successor liability may arise as a legal consequence.

Fraudulent transfer: If a deal appears intentionally designed to sidestep creditors, including tax authorities, courts may interpret it as a deceptive transaction and assign liability to the buyer.

Asset vs stock purchase: Which carries more sales tax risk?

Asset purchase: Although this type of transaction typically carries a reduced risk of successor liability, that risk isn’t fully eliminated. Buyers aren’t usually held responsible for a seller’s obligations unless certain exceptions apply, such as a de facto merger, fraudulent transfer, or an express assumption outlined in the purchase agreement. However, several states enforce statutes that impose successor liability for outstanding sales taxes, particularly when bulk sale requirements or clearance certificates are overlooked.

Stock/equity purchase: This form of transaction carries an elevated risk of successor liability, as the buyer takes ownership of the entire business, including all assets and existing liabilities. This may include unresolved or previously undisclosed sales tax obligations that transfer with the entity.

State-by-state differences in sales tax liability

Successor liability rules vary widely by state. Some (e.g., Illinois and Pennsylvania) impose it through tax statutes covering sales, income, franchise, and withholding taxes. Others rely on common law principles like de facto merger or fraudulent transfer.

States such as New York and Pennsylvania require advance notice of asset transfers and may assign liability if bulk sale procedures are skipped. In some states, relief may be available if the buyer secures a tax clearance certificate or bulk sale release (e.g., California, Texas, New York).

In Texas as well as several other states for example, courts may impose liability if the deal appears structured to evade creditors, using multi-factor fraud tests.

Economic nexus rules, adopted by all sales-tax-collecting states mean a business can owe sales tax even without a physical presence, and that exposure can transfer to a buyer post-acquisition.

You can see why it makes sense to discuss any M&A deal with a specialist tax consultant ahead of time as the differing state obligations make this a complex area to interpret, manage and plan for.

Need help navigating sales tax compliance across multiple states? Schedule a consultation with Miles Consulting Group.

8 ways to protect yourself from successor liability in M&A

Successor liability related to sales tax presents a notable risk in mergers and acquisitions. To manage this exposure, make sure you perform rigorous due diligence, structure the deal strategically, and incorporate robust contractual safeguards. The degree of risk is heavily influenced by state-specific regulations and the transaction’s structure. But by integrating legal, financial, and procedural controls throughout the process, you can significantly reduce your vulnerability to inherited tax obligations.

Below you’ll find our buyer’s checklist that’s been designed to help you avoid unexpected tax liabilities and ensure a penalty-free acquisition.

  1. Conduct thorough sales tax due diligence
  • Conduct in-depth due diligence to uncover outstanding sales tax obligations, nexus concerns, or compliance gaps. This should include a review of historical filings, payment records, and any communications with relevant tax authorities.
  • Verify the seller’s compliance with applicable state and local sales tax laws, keeping in mind that regulations and associated risks differ significantly from one jurisdiction to another.
  1. Comply with bulk sale and notification procedures
  • In many states, buyers must comply with statutory bulk sale rules or submit formal notices to tax authorities during asset acquisitions. Following these procedures helps safeguard against inheriting unpaid sales tax obligations from the seller.
  • If the seller fails to comply, buyers may choose to retain a portion of the purchase price until the state verifies that all sales tax obligations have been settled.
  1. Structure the transaction carefully
  • Asset purchases typically provide greater protection from successor liability compared to equity deals, though exceptions can apply. To mitigate risk, buyers should ensure the purchase agreement explicitly defines which liabilities are accepted and which are excluded.
  • Use clear, narrowly defined language in the purchase agreement to prevent the risk of implicitly taking on unwanted liabilities.
  1. Obtain tax clearance certificates
  • Where applicable, obtain tax clearance certificates from the appropriate state tax authorities. These documents confirm that the seller has settled all sales tax obligations, helping to reduce your exposure to successor liability.
  1. Use escrow, deferred consideration, and indemnities
  • Consider negotiating an escrow or deferred payment arrangement and setting aside a portion of the purchase price to cover any sales tax liabilities that may surface after closing.
  • Incorporate strong indemnification clauses in the purchase agreement, obligating the seller to cover any pre-closing sales tax liabilities identified post-transaction.
  • Include targeted indemnities for known risks, particularly where standard warranty and indemnity insurance does not cover identified tax exposures.
  1. Get insurance
  • You can take out insurance to cover you against potential sales tax liabilities. These policies are especially valuable when the seller cannot or will not offer adequate indemnity, though they can be expensive and may exclude certain exposures.
  1. Pursue Voluntary Disclosure Agreements (VDAs)
  • If historical sales tax liabilities do emerge, you can reduce your exposure by initiating VDAs with state tax authorities. VDAs often shorten the lookback period and mitigate penalties for prior noncompliance.
  1. Make sure the seller stays accountable post-closing
  • You can stipulate that the seller remains in existence for a defined period after closing. You can also delay passing on the sale proceeds until all tax liabilities are cleared. This ensures that the seller has resources available to satisfy any indemnity claims that may come to light during the M&A process.

Sales tax and successor liability can pose hidden risks in M&A deals, especially if buyers overlook jurisdictional differences or fail to investigate the seller’s compliance history. Proactive due diligence is therefore key to identifying exposures early and shaping protective deal terms.

How Miles Consulting Group helps buyers & sellers in M&A

At Miles Consulting Group, we specialize in state sales tax remediation as a result of M&A transactions. We can assist both buyers and sellers and our services include:

  • Nexus Studies: Identify economic nexus obligations across states, helping companies assess where sales tax may be due. (It’s helpful to engage in these studies before the deal – particularly on the seller side. But we can also assist with this during the deal, or even after to clear up exposure.)
  • Taxability Reviews: Clarify how products are taxed in various jurisdictions, ensuring that your business complies with state-specific laws. This might be particularly useful in the technology space where the taxability of items such as software, SaaS, information services, and digital products may be confusing.
  • Documentation Cleanup: Ensure that exemption certificates and sales tax filings are accurate and audit-ready, minimizing the risk of post-transaction disputes.
  • Audit Defense: Protect your business during state audits, helping to resolve issues quickly and minimize penalties.
  • M&A Readiness: As a seller, prepare for buyer scrutiny by proactively addressing tax liabilities and ensuring your business is in compliance with all relevant state tax laws. On the buyer side, review the nexus, taxability and possible exposure of the seller.

State tax compliance is a critical component of successful M&A transactions. For all parties involved, addressing nexus, exemptions, and documentation early can safeguard valuations, streamline negotiations, and reduce risks. Whether you’re buying or selling, understanding the nuances of state tax laws is essential for a smooth, compliant transaction.

Don’t know where to start? We do. Contact Miles Consulting Group today to ensure your M&A transaction is smooth, compliant, and successful. Book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com