Avoiding Successor Liability in South Carolina M&A: How to Secure Tax Clearances from SCDOR

Acquiring a successful business in Charleston, Columbia, or Myrtle Beach is an exciting venture. However, a major hidden danger lurks in the transition process: successor liability. Many buyers mistakenly believe that structuring a deal as an asset purchase protects them from all of the seller's past debts. While this is true for most commercial debts, state taxes operate under entirely different rules. If you buy a business that owes money to the state, the government can come after you for the full amount.

Understanding Successor Liability under SC Law

In South Carolina, the state aggressively protects its tax revenues. Under S.C. Code Ann. § 12-54-124, a purchaser of a business or its stock of goods becomes personally liable for the seller's unpaid taxes, penalties, and interest. This means if the previous owner failed to remit sales tax collected from customers or did not pay employee withholding taxes, the burden transfers directly to your new company the moment you close the deal.

Inheriting Sales, Use, and Withholding Taxes

Successor liability primarily targets trust fund taxes. These are taxes the business collected on behalf of the state-like sales tax at a retail store or state income tax withheld from employee paychecks. If the seller pocketed this money instead of sending it to the state, the government views the new buyer as the successor in interest. Without proper legal steps, the state can freeze your new business bank accounts or place liens on your newly acquired assets to satisfy the seller's debt.

Securing a Certificate of Tax Compliance

The only foolproof way to defeat successor liability in South Carolina is to obtain official clearance from the state before handing over the purchase money. You must require the seller to request a Certificate of Tax Compliance from the South Carolina Department of Revenue, Columbia.

To do this, the seller must submit Form C-268, South Carolina, Department of Revenue, Request for Certificate of Tax Compliance. The SCDOR will review the seller's account to ensure all returns are filed and all balances are paid. If the seller is in good standing, the state issues the certificate. If you, as the buyer, hold this certificate at the time of closing, the state cannot hold you liable for taxes that are later discovered. If the seller owes taxes, your attorney can require that those taxes be paid directly out of the seller's proceeds at closing.

The Repeal of UCC Article 6 Bulk Sales Laws

Historically, buyers relied on 'Bulk Sales' laws under the Uniform Commercial Code (UCC) to notify creditors of an impending business sale. However, South Carolina repealed its bulk transfer laws, previously found under S.C. Code Ann. § 36-6-101. With the bulk sales shield gone, commercial creditors rely on standard fraudulent transfer laws, but the state relies heavily on the successor liability statute. This makes obtaining the SCDOR tax clearance the primary, mandatory shield for any buyer in the state.

Drafting Strict Indemnification Clauses

While the Certificate of Tax Compliance protects you from state tax liability, it does not protect you from other hidden debts, such as unpaid vendor invoices or pending local lawsuits. To secure full protection, your Asset Purchase Agreement (APA) must contain strict indemnification clauses. An indemnification clause legally requires the seller to reimburse the buyer if a pre-closing liability surfaces after the deal is done. You should find a qualified attorney through our US Lawyers Directory to draft these clauses, ensuring they are backed by an escrow holdback-meaning a portion of the purchase price is kept in a trust account for 12 to 18 months specifically to cover surprise debts.

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