A purchaser of real property may be subject to liability for taxes, including sales taxes, owed by the Seller to the Florida Department of Revenue (“DOR”). Title insurance does not protect against this liability. Under F.S. 213.758, a transferee of more than 50% of the assets of a business (including real property) is liable for unpaid tax owed by the transferor arising from the operation of that business. Two exceptions to this rule exist when the transfer is either (1) an involuntary transfer (i.e. bankruptcy, foreclosure etc.) or (2) the transferee is not an insider and the asset is either (i) a 1-4 family residential real property; (ii) unimproved real property; or (iii) owner occupied commercial real property and, in each case, is not accompanied by a transfer of other assets of the business.
One common scenario where a buyer could see potential liability arises in the acquisition of non-owner occupied commercial real estate. Sales tax is owed on commercial lease payments in Florida and, as such, the owner and landlord of property subject to commercial leases owes tax to the DOR on the lease payments. If the owner fails to pay the tax and then sells the property, assuming the property consists of over 50% of the assets of the owner, the buyer of the property is subject to liability for the unpaid taxes owed by the seller. This situation is quite common because special purpose entities are frequently formed solely for the purpose of owning and operating income producing real estate, such as shopping centers, office buildings, and free-standing restaurant and retail sites.
One way to protect a buyer against this liability is to request a certificate of compliance from the Florida Department of Revenue. If the buyer receives a certificate of compliance from the Florida Department of Revenue showing that the seller has not received a notice of audit, the seller has filed all required tax returns and the seller has paid all tax arising from the operation of the business, the buyer will not be subject to transferee liability. A buyer can also request a clearance letter. The clearance letter typically takes about 7-10 days and provides a status of account. Unlike a certificate of compliance however, a clearance letter does not exempt the buyer from future audits that may cover periods before the business was sold.
Buyers can also protect themselves with an indemnification from the seller in the purchase agreement. Note however that an indemnification from a special purpose entity that has now lost its assets could have little value post-closing. As such, it is advisable that the principals of the seller join in any indemnification and/or there be a hold-back of closing funds to meet future tax liabilities.
Although foreclosing lenders are exempt from liability under the involuntary transfer exception above, lenders should still try to ensure that their borrowers are protected from inheriting an unknown tax liability. Borrowers are better able to start and continue payments to their lenders when other liabilities are minimized.
