Director's Rule 5-042

Successor liability

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Successor liability                                                         

(1) Liability in general. This rule explains the responsibilities and liabilities of a successor per SMC 5.55.130. A person to whom business property is sold or transferred, or who is obligated to perform the terms of a contract, may be liable to pay the transferor's or contractor's business license tax liability even if the taxes have not yet been assessed. If the criteria for liability are met, such person becomes a "successor" and is jointly and severally liable with the taxpayer to pay the tax. The Director may collect the tax from either the successor or the taxpayer, and is not required to first attempt collection from the taxpayer. If the Director collects the tax from the successor, the amount collected is considered to be a payment to the taxpayer. If the tax payment exceeds the price, the transferee may collect the difference from the taxpayer, but not from the Director.

(2) Successor defined.

Pursuant to SMC 5.30.050 G, "Successor" means any person to whom a taxpayer quitting, selling out, exchanging or disposing of a business sells or otherwise conveys directlyor indirectly, in bulk and not in the ordinary course of the taxpayer's business, any part of the materials, supplies, merchandise, inventory, fixtures or equipment of the taxpayer. Any person obligated to fulfill the terms of a contract shall be deemed a successor to any contractor defaulting in the performance of any contract as to which such person is a surety or guarantor.

(a) Transfer of property. A person will not be liable to pay the taxpayer's tax unless the person is a "successor." In general, a "successor" includes all persons who acquire a taxpayer's business property in bulk, whether they operate the business or not, unless the property is acquired through insolvency proceedings or regular legal proceedings to enforce a lien, security interest, judgment, or repossession under a security agreement.

(b) Contractor defaultinq on contract. A person who is a surety or guarantor on a contract and is also obligated to fulfill the terms of the contract is a successor to the contract.

(3) Taxpayer's obligations.

(a) Payment required upon transfer of propertv. Any taxpayer that quits business, or sells out, exchanges, or otherwise disposes of his or her business or stock of goods, shall, within ten (10) days thereafter, make a return and pay the tax or fee due.

(b) Payment required upon default in contract. Any contractor who defaults on a contract, shall, within ten (10) days thereafter, make a return and pay the tax or fee due.

(4) Successor's obligations.

(a) The successor must withhold the purchase or contract price a sum sufficient to pay any taxes that are currently due or that may still be assessed against the taxpayer until such time as one of the following first occurs:

(i) The taxpayer produces a receipt from the Director showing payment in full of any tax due and that no further tax is due or will be assessed against it; or

(ii) More than six (6) months has passed since the successor notified the Director of the transfer or default and the Director has not issued, and notified the successor of, an assessment against the taxpayer.

(b) The successor must notify the Director in writing of the date of the transfer or default. The written notice must contain the following information:

(i) The (predecessor) taxpayer's name, business name, address, and UBI number;

(ii) The successor's name, business name, address, and UBI number;

(iii) The date of the acquisition;

(iv) Whether or not the successor acquired any part of the materials, supplies, merchandise, inventory, fixtures or equipment of the (predecessor) taxpayer;

(v) A description of the assets acquired and their estimated fair market value;

(vi) The total costs of acquisition; and

(vii) How the person became a successor (i.e., asset purchase, merger, guarantor of a defaulting contractor, etc.).

(5) Examples.

The following factual situations illustrate the application of the foregoing:

(a) Taxpayer sells business and stock of goods. Purchaser is the successor.

(b) Taxpayer sells stock of goods in bulk. Purchaser is a successor, even though taxpayer continues in business through purchase of new stock of goods.

(c) Taxpayer sells business, including fixtures and good will, to one party and his stock of goods to another. Both purchasers are successors.

(d) Taxpayer sells one branch of the business and stock of goods, and continues to carry on his or her business at other locations. Purchaser is successor to the portion of the business purchased and liable for any tax incurred in the operation of that branch of the business.

(e) Taxpayer leaves business, including fixtures and stock of goods, which his landlord holds for unpaid rent. The landlord will be a successor unless he proceeds to foreclose his landlord's lien by posting notice and holding a sale by the sheriff.

(i) If the landlord, instead of foreclosing his lien, takes a bill of sale to all of the taxpayer's interest in the business or stock of goods in satisfaction of rent, he is a successor.

(ii) If the landlord fails to foreclose his lien and sells the fixtures or stock of goods and the purchaser continues the business or a similar business, the purchaser is a successor.

(iii) If the taxpayer does not leave any fixtures or stock of goods and the landlord engages in a like business in the same location, or rents to a third person, neither the landlord nor the third person is a successor.

(f) Taxpayer purchases business, equipment, or stock of goods under a security agreement and the vendor repossesses the property; the vendor is not a successor.

(i) If the vendor sells to a third person who continues the business, the third person is not a successor.

(ii) If the taxpayer sells his equity under the security agreement to a third pergon, the third person is a successor.

(iii) If the property is not repossessed and the vendor buys back the interest of the taxpayer, the vendor is a successor, and any third person who purchases the same from such vendor and continues the business is also a successor.

(g) Taxpayer dies or becomes bankrupt, goes into receivership, or makes an assignment for the benefit of creditors.

(i) The executor, administrator, trustee, receiver, or assignee is not a successor but stands •in the place of the taxpayer and is responsible for payment of tax out of the proceeds derived upon disposition of the assets.

(ii) A purchaser from the executor, administrator, trustee, receiver, or assignee is not a successor, unless under the terms of the purchase agreement he assumes and agrees to pay taxes and/or lien claims.

(h) Taxpayer is a contractor and is required to post a bond to insure completion of the contract. Taxpayer defaults on the contract and the bonding company completes it. The bonding company is a successor to the contractor to the extent of the contractor's liability for that particular contract and is also liable for taxes incurred in the completion of the contract.

Effective: May 15, 2007.    

I Dwight D. Dively, Director of the Department of Finance of the City of Seattle, do hereby certify under penalty of perjury of law, that the within and foregoing is a true and correct copy as adopted by the City of Seattle, Department of Finance.

City Finance

Jamie Carnell, Interim Director
Address: 700 Fifth Ave., 4th Floor, Seattle, WA, 98104
Mailing Address: P.O. Box 34214, Seattle, WA, 98124-4214
Phone: (206) 684-8484
Hours: 8:30 a.m.-4 p.m.

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City Finance manages the financial operations of the City of Seattle and oversees the City’s financial controls and enterprise reporting while working to achieve the goals set by the Mayor and the City Council.