Sales tax liability follows the assets in California unless the buyer receives a certificate from the State Board of Equalization that the seller has paid all sales or use taxes due, a state appeals court ruled recently.

The case is a warning to buyers to insist on a tax certificate at closing.

In the case, certain California taxpayers agreed to purchase business assets from a seller and placed a portion of the sales price in escrow, to be released when the SBOE issued a certificate that the seller owed no sales or use taxes. Before closing, the buyers’ escrow agent received multiple creditor claims against the seller for amounts exceeding the escrowed funds, including claims from the IRS. The escrow agent then filed an “interpleader” complaint in court naming as defendants both the SBOE and the IRS to let the two tax agencies fight it out between themselves over who was entitled to the money in escrow. However, the SBOE disclaimed any interest “it my have in the [escrowed] funds.”

Later, the SBOE held the buyers personally liable for failing to withhold the amounts the seller owed in unpaid sales and use taxes under a “successor liability statute.” The court found that the buyers failed to comply with the literal words of the successor liability statute because, so long as a claimant superior to the SBOE — the IRS — had rights to the money in the escrow account, the buyers did not “withhold” sales taxes at closing as required by the statute. The court also said the escrowed funds were released before the SBOE produced a certificate clearing the seller of any tax liability. It was irrelevant that the SBOE had a chance through the interpleader action to get the escrowed funds but left them for the IRS.

The case is Schnyder v. State Board of Equalization.