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News & Insights

 
19Jun

Avoiding Successor Liability for Unpaid Taxes When Buying a Business in Pennsylvania

Anyone considering the purchase of an existing Pennsylvania business should be aware of Pennsylvania’s “Bulk Sales” laws. These statutes are designed to protect the Commonwealth’s ability to collect unpaid taxes from a business seller, but also provide the buyer with immunity from successor liability for the seller’s unpaid tax obligations to the state. Wise buyers will comply with the pre-close notice requirements to the Department of Revenue and the Department of Labor in order to mitigate their risks when buying a business.

Pennsylvania’s Bulk Sales Act, 69 Pa. Stat. Ann. § 521 et seq., addresses transfers of business assets outside the ordinary course of business. Pennsylvania imposes significant obligations on parties involved in the sale of a business through 69 P.S. § 529 and 72 Pa. Stat. Ann. § 1403 for the Department of Revenue, and 43 Pa. Stat. Ann. § 788.3(a) for the Department of Labor. The key concern for purchasers is successor liability for unpaid state taxes owed to the state. Under Pennsylvania law, when a corporation, limited partnership, company, or similar business entity transfers 51% or more of its assets—including inventory, equipment, fixtures, machinery, buildings, or real estate—the seller must obtain a tax clearance certificate from the Pennsylvania Department of Revenue and the Department of Labor showing that all required tax reports have been filed and all state taxes have been paid through the date of transfer. The process begins by filing notice with the Departments at least ten days before the closing date of the buy/sell transaction.

The statutes place corresponding duties on the purchaser. If the buyer fails to require and obtain the tax clearance certificate, or to make timely notice, the buyer may become personally liable to the Commonwealth for the seller’s unpaid Pennsylvania taxes, even if those taxes have not yet been assessed or determined at the time of closing. In practical terms, a buyer should never assume that a seller’s representations regarding tax compliance are sufficient. Instead, the buyer should insist that the seller obtain a Bulk Sale Clearance Certificate from the Departments, and provide notice to the Departments at least ten days before closing. Recent Pennsylvania cases demonstrate that courts strictly enforce these requirements. Purchasers who failed to obtain the required certificate have been held responsible for substantial tax liabilities owed by the seller, notwithstanding contractual provisions allocating responsibility to the seller. Reese's Pizzas and More v. PA Dept of Labor, 93 A.3d 914 (2014); HUF Restaurant, Inc. v. Commonwealth, 315 A.3d 205 (2024).

Accordingly, due diligence in a business acquisition should include: (1) determining whether the transaction involves 51% or more of the seller’s assets; (2) requesting evidence of tax compliance; (3) requiring a Pennsylvania Bulk Sale Clearance Certificate or notice as a closing condition. Often the parties to a business buy/sell transaction “don’t know what they don’t know”, so working with experienced transaction counsel is the best way to mitigate your risks as a buyer or a seller. If you need help preparing your business for sale, or help evaluating or completing a business buy/sell transaction, contact RC Kelly Law at 215-896-3846 or rckelly@rckelly.com.   

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