Suppose you buy a commercial property in Ohio. You bought an owner’s policy of title insurance, and the title insurance company checked to make sure there are no federal or Ohio tax liens.
The purchase contract gave you a credit for the seller’s pro-rated share of real estate taxes. If you were particularly aggressive, the credit may even be based on the purchase price, to protect against a retroactive increase in case the county auditor’s latest appraised value was less than the purchase price. Are you fully protected against tax issues?
Not necessarily. If the real estate consisted of all or nearly all of the seller’s assets, or if your purchase included goods that the seller held for resale, you may be responsible to the state of Ohio for the seller’s unpaid commercial activity tax, employer’s withholding tax, and sales tax, along with any interest or penalties. These three taxes are often addressed in the purchase of a going business, but they tend to be overlooked in the purchase of real property.
Commercial Activity Tax. Most Ohio business operators are required to pay commercial activity tax on their gross revenue. When the company is sold, or the operator quits the business or disposes of at least 75 percent of its assets (other than in the ordinary course of business), the seller has 45 days in to file a final commercial activity tax return, and pay any taxes, interest and penalties. The purchaser will be liable for the taxes, interest and penalties unless the purchaser withholds a sufficient amount of the purchase price to cover those obligations, until the former owner produces a receipt from the tax commissioner showing that the amounts are paid, or a certificate indicating that no taxes are due.
Employer’s Withholding. Did the seller have any employees? An employer who is required to deduct and withhold Ohio income tax from the employee’s paycheck has 15 days (not 45 days) after selling or quitting business to file a final return, and pay any taxes, interest and penalties. As with commercial activity tax, a purchaser who fails to withhold enough of the purchase price to cover those obligations will be personally liable to the state of Ohio.
Sales Tax. Finally, was the seller involved in retail sale of goods or services, and if so, were any of those goods included in the purchase? Any person or company responsible for sales taxes must file a final return within 15 days after going out of business, or selling the business or its stock of merchandise. As with commercial activity tax and employer withholding, the sales tax statute requires the purchaser to withhold enough money from the purchase price to cover the unpaid taxes, interest and penalties. If the purchaser does not withhold the required amount, the purchaser will be personally liable to the State of Ohio for the unpaid sales tax, interest, and penalties.
Title insurance will not protect against these taxes, since the tax obligations are not shown by the public record as of the date of closing, and are not yet liens against the real estate.
Not every real estate purchase will expose the purchaser to all three of these taxes. Some sellers may not hit the threshold for commercial activity tax. Many sellers have no employees, particularly if the seller is a single asset limited liability company. And many real estate sales don’t involve sellers who are required to pay sales tax. But a savvy purchaser should analyze the risk for all three taxes, perform the necessary due diligence, and make sure that the purchase agreement includes adequate holdbacks, representations, and indemnities to protect against the risk.
- Of Counsel
Jack S. Levey has literally "written the book" on Ohio real estate law. A co-author of "Baldwin's Ohio Practice, Ohio Real Estate Law," he is recognized as a leading commercial real estate attorney, successfully negotiating and ...
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