Successor Liability Issues to Address Before Buying an Amazon Business
Why is successor liability essential, and what to know before you buy an Amazon business?
When you purchase an Amazon business, many due diligence factors are to consider and evaluate to make sure you obtain the best return on your investment.
An Amazon FBA business that is 2+ years or older is more susceptible to an audit because of the physical nexus caused by FBA stock.
Marketplace nexus became more popular in late 2019 and 2020. before that period, the seller was responsible for collecting and remitting sales tax in the states with FBA stock. Several states have the list of Amazon sellers, including California, Connecticut, New York, North Carolina, Pennsylvania, Washington, and Wisconsin.
The factors most looked at include vital metrics such as the product category, overall sales, profits, profits trajectory, product ranking, seller ranking, reviews, inventory and fulfillment performance, and many others.
Buying a business with SOPs and automation is vital for when you take over. There are many legal issues to consider with IP and the legal transfer of ownership.
Sales tax was an issue, especially before the 2018 Wayfair vs. South Dakota U.S. Supreme Court case. At this time, Amazon is collecting sales tax in 43 of the 45 states with sales tax plus Alaska, so most buyers would not consider sales tax to be any concern.
Unfortunately, sales tax, specifically something called “successor liability,” could be a “sales tax time bomb” in your purchase, especially if you plan to sell the new brand on a new website or Shopify store to grow market share.
What is successor liability, and why should you care?
Most Amazon sales are as an asset sale. It is a common belief that the liabilities remain with the seller and are not transferred to the buyer. This is true for most business liabilities; it is NOT TRUE for SALT (sales and local tax liabilities).
The transfer of SALT liability from the asset seller to the asset buyer is known as “successor liability.” Nearly every state sees this situation where the business purchaser will inherit any known or UNKNOWN SALT liabilities. The vital part is UNKNOWN SALT liabilities.
This means that it is the buyer of an Amazon business to become aware of the SALT liabilities.
What Should the Buyer of an Amazon Business Do to Protect Themselves?
The buyer of an Amazon business should request a detailed SALT work plan as part of their due diligence work process. The work plan should include a sales tax nexus analysis to determine the actual nexus dates in each state and total liability plus penalties and interest. This will result in a report on the undisclosed liabilities on behalf of the seller.
If it is determined that the seller has undisclosed SALT liabilities, this will usually result in a lesser sales price and take longer to close. SALT liabilities have been known to also kill a good deal. In some cases, there are funds to be set aside in escrow until the states clear the liabilities.
Your Responsibility as a Seller
You will want to be clear on your liabilities BEFORE you sell your business. You will want months of planning to determine your SALT liabilities. If minor liabilities are discovered, this will be essential data to have on file during the closing process.
Your Responsibilities as a Buyer
You will evaluate all the business numbers you are purchasing inside and out, checking reviews to make sure the numbers all line up in your attempts to predict future sales. Make sure you add a sales tax nexus study to your checklist to determine the potential liability for your purchase. It is recommended that the buyer obtains a tax clearance certificate BEFORE they purchase an existing business. Ninety days before closing is recommended.
How Does the State Find Out about Successor Liability?
When the buyer goes to register for sales tax registrations, several states on their form add a section where they ask if you purchased your business from another party. If so, you must identify the company’s name, the EIN, address, and other details from whom you made the purchase.
If you are selling on Amazon, and Amazon is already collecting sales tax, why would the buyer even register for any sales tax permits? That is a good point. As you know, Amazon, a marketplace facilitator, is currently collecting sales tax in 43 states, soon to be more, by July 1st, 2021.
There are a few states that require registration, even in this situation. What happens if the purchaser plans to sell on a Shopify store? You need to track the economic nexus in each state from your Shopify sales.
As you cross the economic nexus thresholds (and some states count both the marketplace and non-marketplaces sales), the buyer will need to register in all those states.
In speaking to the department of revenue in Missouri, they shared with us, “they would do their best to find out if their former owners. Their best resource is form 2643.
Read the form here, and see page 2 with the warning, “Business Buyer Beware.”
What is a Tax Clearance Certificate?
The department of revenue of a state will typically issue a tax clearance certificate to the purchaser of a business that releases the purchaser from any sales and use tax liability or admissions and dues tax liability of the seller, or both.
Only the purchaser of a business or a practitioner (an attorney or accountant) representing the purchaser may request a tax clearance certificate.
When does a Buyer Get a Tax Clearance Certificate from the Sellers?
A tax clearance certificate should be requested BEFORE purchasing the business. The state will then investigate if there are still taxes that are due from the point of acquiring a business. If there are balance or unfiled returns, the state will not issue a tax clearance certificate.
To obtain a tax clearance certificate, the seller must have a state tax account. If the seller never registered for sales tax (and should have been), you cannot get a tax clearance certificate.
It is recommended to request the clearance prior to purchasing the business to avoid successor liability.
What are Your Options if You Can’t Get a Tax Clearance Certificate from the Seller?
Some states such as Michigan offer a suggestion in the situation, your seller is not providing a tax clearance certificate.
The Michigan successor liability law provides that a purchaser can limit its successor liability by creating a formal escrow account sufficient to cover the amount o unpaid taxes, plus accrued interest and penalties, and maintaining the escrow account until the seller provides the purchaser with a valid tax clearance certificate or documentation that the Department did not respond to the seller’s tax clearance certificate request within 60 days.
To determine the accurate amount for that trust account in Michigan or any other state, we recommend a complete sales tax nexus analysis on the seller before you purchase an e-commerce business.
What Should the Buyer Do if they Believe the Seller Should have Been Registered for Sales Tax But Wasn’t?
According to the state of Wisconsin, if there is no sales balance or requirement then there would be no successor liability. If the purchaser has reason to believe the seller has a requirement, have the seller contact the department to resolve any potential audit issues before the sale
What Do the State’s Say about Successor Liability?
Here are a few examples of other states that discuss successor liability and a tax clearance certificate:
What Type of E-commerce Businesses are More Likely to be Subject to a Sales Tax Audit?
An Amazon FBA business that is 2+ years or older is more susceptible to an audit because of the physical nexus caused by FBA stock. Marketplace nexus became more popular in late 2019 and 2020. Prior to that period, the seller has a responsibility to collect and remit sales tax in the states where they had FBA stock. Several states have the list of Amazon sellers including California, Connecticut, New York, North Carolina, Pennsylvania, Washington, and Wisconsin.
E-commerce businesses with only e-commerce nexus are less likely to see a state audit, but develop a larger material risk the longer they don’t get into compliance. Some states such as New York, offer a reward/bounty to turn in other sellers not compliant with sales tax. See the MyPillow case in New York.
In the end, it is your responsibility as a buyer and seller to know your numbers. Even if you disagree with who should pay sales tax or why you don’t control the inventory that created nexus, it is what the states say about past sales tax liability from the company you purchased that is important. Be prepared and proactive and obtain a sales tax nexus analysis to protect your interests whether you are a buyer or seller.