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Business Taxes Law Guide—Revision 2024

Sales and Use Tax Annotations


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S


535.0000 Successor's Liability—Regulation 1702

Annotation 535.0032


535.0032 Guarantor as Original Purchaser. A shopping center owner has a shopping center with a grocery store occupying about 60 percent of the area of the shopping center. The grocery store was an anchor tenant, which attracted customers to the other tenants' businesses. Without this anchor tenant the center's owner might have lost other tenants in the shopping center. The center's owner extended financial assistance to the owner of the grocery store in an effort to keep this tenant. The shopping center owner signed a continuing guarantee in which he guaranteed to pay up to a certain amount of any indebtedness incurred by the owner of the grocery store to the store's main supplier. He also lent the grocery store owner a sum of money to infuse cash into the business and help continue its operation. The financial assistance proved fruitless and the owner of the grocery store left. The shopping center owner took over the operations of the store the following day and changed the name of the store. Because the grocery store was an anchor tenant and because the shopping center owner could be liable under the guarantee for the owner's debts, he felt compelled to keep the business going. Shortly after the owner left the store, he and the center's owner entered into a sales agreement whereby the store owner sold the lease of the premises, his interest in equipment, furniture, and fixtures, inventory of stock in trade, and the name and goodwill of the business. The money deposited in escrow was used mostly to pay other lienholders whose liens encumbered the property of the grocery store and only a small amount was paid to the Board. Thereafter, a notice of successor's liability was issued. The above situation raised the following issues.

(1) Whether the center's owner, as a third party guarantor, should be considered the "original purchaser" of the inventory.

If so, the center's owner did not purchase the inventory since he already owned it. In this situation, the guarantee was not made in connection with the purchase of any particular property. There are no terms in the guarantee or in any other agreement executed prior to the sale in issue which indicate that title to the inventory vests in the center's owner. Therefore, the center's owner was not the owner of the inventory at the time of the sale.

(2) Whether the payment made by the center's owner into escrow and paid to the store's main supplier is consideration since the center's owner was liable to the supplier as guarantor.

The purchase price was paid into escrow, and the escrow agent distributed the funds to the creditors of the prior owner including its main supplier. Accordingly, the prior owner received a benefit, i.e., consideration, by having its liabilities to the main supplier extinguished. Its contingent liability to the center's owner was also extinguished since the center's owner was no longer liable under the guarantee.

(3) Whether the current owner of the grocery store can be liable as successor when the full purchase price was committed to other creditors who had claims with higher priority than the Board's claim.

Secured liabilities in an amount as much as the purchase price does not avoid the clear statutory provisions that a successor is liable for his predecessor's sales tax liability (up to the amount of the purchase price) if the successor does not obtain the certificate provided for under Regulation 1702(c). 9/21/93.