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Successor Tax Liability: The Hidden Costs of Business Acquisitions in the Pacific Northwest



While it is common knowledge that Washington State does not have a personal income tax, it would be a mistake to assume that the sale of a business has no tax consequences to past or future owners. This article will explore the tax consequences of buying or selling a business in Washington, using the tax regime in the neighboring state of Oregon for contrast. To illustrate the tax considerations of business acquisitions in the Pacific Northwest, this article will follow the hypothetical sales of a Washington business to an Oregon resident and of an Oregon business to a Washington resident.

Income Tax Consequences

The vast majority of states in the United States impose a personal income tax on the income of all residents, as well as nonresidents earning income in the state.1 For example, Oregon imposes a personal income tax on all the income of full- and part-time Oregon residents, and on the Oregon-sourced income of nonresidents. The Oregon income tax regime uses a graduated tax rate, ranging from 5 percent to 9.9 percent. For Oregon income tax purposes, the amount of an Oregon resident’s taxable income is tied to the resident taxpayer’s federal taxable income, subject to modification for Oregon-specific deductions and credits. A nonresident taxpayer, on the other hand, has income subject to the Oregon income tax only to the extent that his or her income is derived from Oregon sources. Therefore, the proceeds from the sale of a business in Washington would be taxable income for an Oregon resident, but not taxable income for a nonresident. Conversely, the proceeds from the sale of a business in Oregon would be taxable income for both a resident and a nonresident.

Many states, Oregon included, also impose a corporate income tax on the income of corporate business entities. In Oregon, corporations are subject to an excise tax for the privilege of conducting business in the state. The excise tax is measured as a percentage of the corporation’s income, and is easily mistaken for an income tax. Yet Oregon also has a corporate income tax, imposed on all corporations doing business in the state and measured as a percentage of the corporation’s Oregon-sourced income. The income and excise taxes are mutually exclusive, so that the income of a corporation is subject to only one or the other. Much like the personal income tax, the corporate tax regimes purport to tax only a nonresident corporation’s income that is derived from or apportioned to Oregon. Thus, the proceeds of the sale of a business in Washington would be taxable income to an Oregon parent corporation, and the proceeds of a sale of an Oregon business would be taxable income to a nonresident parent corporation.

It should come as no surprise to those familiar with the double taxation inherent in the corporate tax scheme generally that Oregon resident individuals would bear a heavy income tax burden if an Oregon corporation sold a subsidiary company and then dissolved, distributing the proceeds to its shareholders. Indeed, such a transaction would be subject to federal and Oregon corporate income tax on the sale of the subsidiary, followed by federal and Oregon personal income tax on the distribution of proceeds to the individual shareholders.

Sales and Use Tax Consequences

The silver lining for Oregon taxpayers is that no additional tax is imposed on the sale transaction itself. Indeed, apart from the presence of well-known shoe companies, Oregon may be best known among consumers for its abstention from a sales tax regime. Not so in Washington. Oregon’s neighbor to the north has nearly nothing in common with Oregon’s tax structure. Washington imposes a state-level tax on the sale of tangible personal property and authorizes the counties and cities in the state to impose sales taxes as well. Washington also imposes a use tax to prevent consumers from taking advantage of the differences in state tax regimes by making purchases in Oregon, where there is no sales tax, or Idaho, where the sales tax is nearly half that of Washington. Under the use tax system, consumers are required to self-report a tax on the value of all tangible personal property acquired without paying sales tax but used in Washington. Thus, in the hypothetical sale situation, the purchase of a Washington business by an Oregon taxpayer would be subject to sales tax to the extent that the sale included tangible property, such as equipment or other tangible capital assets. In contrast, the sale of the Oregon business to a Washington taxpayer would not be subject to sales tax, but could create a use tax obligation if the purchaser used the acquired business’s assets in Washington.

Business and Occupation Tax Consequences

In addition to the sales tax, Washington imposes a business and occupation (“B&O”) tax on the privilege of doing business in Washington. The B&O tax is a gross-receipts tax calculated as a percentage of the value of products or the gross income of a business at every level of production. B&O tax does not, however, apply to sales outside the ordinary scope of the taxpayer’s business (a “casual or isolated sale”). Because most taxpayers can’t properly be considered in the business of selling their business enterprises, the B&O tax does not generally apply to the sale of a business. Yet because the taxpayer is in the business of selling inventories, the tax does apply to the inventory of the acquired business. As a result, the seller of a Washington business may be subject to B&O tax to the extent that the sale includes inventories. Naturally, the seller of an Oregon-based business does not worry about any additional tax on the business’s inventories.

Real Estate Excise Tax Consequences

Yet another tax consequence arises anytime real estate is sold in the state of Washington.2 The Washington real estate excise tax is a percentage of the sales price of all real estate sold. Much like the B&O tax, the real estate excise tax will apply to any Washington real property transferred in the sale of a business. Therefore, the sale of any Washington business requires a thorough analysis of the business’s assets and the attendant potential tax liabilities.

Successor Liability

Another, perhaps less well-known, difference between the states is who is responsible for payment. Generally, the person paying an income tax is the person who earned income. Thus, if an Oregon resident sold his or her Oregon business, the proceeds of the sale (less the basis in the seller’s ownership interest) would be included in taxable income for the year of sale. Yet in Washington, any tax due from the sale of a business automatically becomes the responsibility of the purchaser if the seller doesn’t pay within ten days.3 Thus, if a Washington resident sold a Washington business, the buyer would foot the tax bill if the seller doesn’t pay up. The obvious application of this state of affairs is that when an Oregon resident buys a Washington company, the buyer could be on the hook twice: primary liability for sales or use tax and successor liability for B&O and real estate excise tax upon purchase, and primary liability for income tax upon sale. To resolve this potential pitfall for purchasers, Washington requires the purchaser to withhold the seller’s tax liability from the purchase price until the seller presents the purchaser with proof showing that the seller has paid its tax liability.

Who Is a Successor

Washington law defines a successor as any person receiving greater than 50 percent of a taxpayer’s tangible or intangible assets in a transaction outside the scope of the taxpayer’s ordinary course of business. This definition also includes any person acting as a surety or guarantor under a contract. So for successor liability to apply, there need only occur an exchange of greater than half the value of the company’s tangible or intangible assets. Yet Washington courts have interpreted this definition broadly, even extending successor status to a lessor who reclaimed equipment from a defunct lessee and, to ensure that the equipment was productively employed, used the equipment in an operating business. Tri-Fin. Corp. v. Dep’t of Revenue, 6 Wash App 637, 495 P2d 690 (1972).

The Washington Department of Revenue clarifies that acquisition of a company’s assets by “regular legal proceedings” doesn’t trigger the successor rules. This includes enforcing a lien, security interest, or judgment. But what constitutes a “regular legal proceeding” may not be entirely clear. For instance, the Appeals Division of the Washington Department of Revenue held that a corporation acquiring assets subject to an IRS lien was not a successor within the meaning of the statute because the assets were acquired by “regular legal proceeding to enforce a lien” when the corporation paid the lien and received a certificate of discharge from the IRS.4 Yet the Appeals Division recently distinguished this precedent from a similar case in which an officer of a dissolved company acquired the company’s assets, satisfied outstanding IRS liens with his own funds, and later contributed those assets to a new company.5 In so distinguishing, the Appeals Division noted that title to the assets acquired in the latter case was not transferred from the dissolving corporation to the acquiring officer and the officer failed to prove that the IRS liens were actually discharged. It is unclear whether the Appeals Division would have followed the precedent set by Determination No. 90-377 if the taxpayer had followed the formalities of discharging the lien. In either case, it is certainly advisable to discharge all IRS liens and to obtain certificates of discharge, but it is not clear whether this remains sufficient to avoid successor liability in Washington.


If an acquiring party is deemed to be a successor, the tax liability to which he or she succeeds is dependent on the nature of the underlying business. Because Washington does not have an income tax, the tax consequences of the transfer must be analyzed under the sales, use, B&O, and real estate excise tax structures. These often present unfamiliar and confusing tax consequences for Oregon purchasers. Further, although Washington requires that purchasers set off the seller’s tax liability from the purchase price, successor liability presents a trap for the purchaser who is unaware of this requirement.

1 Only Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not.
2 Real estate excise taxes also apply in certain counties in Oregon, such as Washington County. Because such treatment is rare in Oregon as a whole, however, the Oregon real estate excise tax is not discussed here.
3 RCW 82.32.140(2).
4 Det. No. 90-377, 10 WTD 173 (1990). 
5 Det. No. 14-0043, 33 WTD 394 (2014).

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