If you’re buying a business in California, there’s one step you cannot afford to skip: requesting a Tax Clearance Certificate from the California Department of Tax and Fee Administration (CDTFA). A recent case shows how a business buyer became responsible for the seller’s unpaid taxes — despite not knowing the liability existed at the time of purchase.
The Hidden Risk: Successor Liability
When you buy a business, you may assume the seller’s tax problems stay with them. But California law holds that if the seller owes unpaid sales tax, and you don’t take specific precautions, you may become personally liable as the “successor.”
This liability can apply even if:
- You never received notice from the CDTFA;
- You assumed your escrow company handled the details;
- You later sold the business;
- The state is still pursuing the seller for the same tax debt.
Real-World Example: Buyer Owed Without Knowing
In a recent decision, the buyer purchased a business in March 2017. Only after the sale closed did the escrow company notify the CDTFA and request a Tax Clearance Certificate. The CDTFA responded with a Notice of Amount Due, sent to both the escrow company and the buyer. The buyer claimed they never saw it and weren’t informed by escrow.
By the time the buyer received a formal Notice of Successor Liability, they had already sold the business. Still, the state held them liable because they failed to request the certificate before closing and did not withhold funds from the purchase price to cover potential taxes. The taxpayer also argued that the CDTFA was settling separately with the seller — but the state is allowed to collect from multiple liable parties until the full debt is paid.
How to Protect Yourself
Here’s how to avoid becoming responsible for someone else’s tax debt:
Request a Tax Clearance Certificate before closing escrow
Submit a written request to the CDTFA. The agency has 60 days from the later of (1) your request, (2) the date of sale, or (3) when the seller’s records are made available for audit. If they don’t issue a certificate or a tax bill within that window, you’re off the hook.
Withhold part of the purchase price
Unless the seller provides a receipt or Tax Clearance Certificate, you must withhold enough from the purchase price to cover any potential tax liability.
Be careful with partial purchases
If you buy just one location of a multi-location business, and that location has unpaid taxes, you could still be liable.
Notify the CDTFA of other changes
If you sell a business, close it, or there’s a change in partners, you should talk to your accountant about notifying the CDTFA. If not, former partners or owners can remain liable for outstanding tax debts.
What If the Seller Settled with the CDTFA?
If the seller entered into a settlement or Offer in Compromise, that doesn’t release you from liability. California can hold multiple people responsible until the full amount is recovered. Even if the seller later defaults, the CDTFA can still pursue the full balance from you.
Bottom Line
If you’re buying a business, always request a Tax Clearance Certificate before closing. It’s the only way to ensure you don’t inherit the seller’s tax debt — known or unknown.
Seeking guidance from business law attorneys with expertise in tax planning law is crucial. At Strategy Law, we help navigate the complexities of business acquisitions, protecting your investment from unexpected tax liabilities. Reach out to our experienced team to ensure a smooth, compliant transition.
¹ Appeal of SL Blue Garden Corp., 2025-OTA-209.
² California Revenue and Taxation Code §6811.
³ California Revenue and Taxation Code §6812.
⁴ California Code of Regulations, Title 18, §1702(e).
⁵ California Code of Regulations, Title 18, §1702.
⁶ California Revenue and Taxation Code §7093.6(j).
⁷ California Revenue and Taxation Code §7093.6(l).
⁸ California Revenue and Taxation Code §6487.2.
⁹ CDTFA Publication 74, Closing Out Your Account.
