- Agency
- The Kentucky Department of Revenue
- Form or filing
- A certificate of tax clearance, requested by the seller once sales and use tax returns are filed and paid
- Timing
- Ask as soon as you have a signed offer, since a missing return or open balance can hold the certificate up past your closing date
Common snag: Closing without the certificate and relying on a promise. A buyer who pays the full price may carry the seller's unpaid sales tax.
This guide is general information and is not tax or legal advice. Confirm every step with your attorney, your CPA and the Kentucky Department of Revenue.
Why Buyers Hold Back Part of the Price
Kentucky law can make a person who buys a business responsible for the seller's unpaid sales and use tax if the buyer does not set aside enough of the price to cover it. A Department of Revenue newsletter describes exactly that situation.
Because of that risk, buyers commonly ask the seller to prove the tax accounts are clear, or they hold back money at closing until the Department confirms.
The Certificate of Tax Clearance
The Department can issue a certificate of tax clearance to a seller whose sales and use tax is filed and paid. A seller who hands that to the buyer usually keeps the full price in the deal.
Read the current request process on the Department's site, since forms and online options change.
Timing Against Your Closing Date
Do not wait until the week of closing. A return you forgot for a slow month, or a balance you thought you had paid, can stop the certificate. Tell your attorney early which accounts might be open so the sale agreement leaves room.
If the answer comes late, buyers often agree to escrow a sum for the gap rather than cancel.
What Slows a Clearance Down
- A sales tax return that was never filed for a month with no sales.
- Withholding or other state accounts with open balances.
- An old address or an account for a location you closed years ago.
- Books that were not reconciled before the request.
Sales That Fall Outside the Rule
The same newsletter says the buyer rule does not reach some transfers, such as an assignment for the benefit of creditors, a mortgage foreclosure or a sale by a bankruptcy trustee.
An ordinary sale between a willing seller and buyer is the case this guide covers.
What Happens to the Sales Tax Permit
Your buyer will usually register on their own. Ask your attorney and the Department how to report the change of ownership and how to close your own account, so you stop receiving return notices after the sale.
Steps for Sellers
- Ask your CPA to confirm every Kentucky return is filed and every balance is paid.
- Ask your attorney whether the buyer expects the certificate at closing.
- Request the certificate as soon as the deal is signed or close to it.
- If it runs late, agree with the buyer on an escrow for the gap.
How This Fits With the Rest
Clearance is only one piece. Read about the unemployment account transfer and the final returns for an LLC.
Clean accounts also raise the price, since buyers trust sellers with everything filed. See what buyers ask for in diligence, then find your sale price.