Earlier this year, the State of Michigan enacted Public Act 3 of 2014, which in part, amends MCL 205.27a(1) regarding the procedures for obtaining a final tax clearance upon the sale of a business. Before the amendment, a purchaser and seller would generally negotiate a dollar amount to be escrowed from the purchase price to protect the purchaser in the event of any outstanding liability for Michigan taxes owed by the seller. The problem inherent in this process was that, prior to closing on the sale, the parties had no ability to obtain guidance from the State as to the amount, if any, of any potential liability. Therefore, if the amount escrowed for unpaid taxes was insufficient to pay the determined unpaid Michigan taxes of the seller, the purchaser would potentially be liable for the deficiency.
Under the amendment to MCL 205.27a(1), a purchaser may now request the Department of Treasury ("Department"), and within 60 days of such request, the Department must provide, a tax liability estimate (generally based off of seller's prior years' returns and tax payments) for the purpose of establishing the amount of any escrow between the purchaser and seller in a sale transaction. The amendment provides that so long as the purchaser and seller properly abide by the procedure for estimating and escrowing funds for the payment of outstanding Michigan taxes, in the event the ultimate tax liability is greater than the amount estimated by the Department to be due, the purchaser will not be responsible for the deficiency. Furthermore, if the Department fails to provide the estimate of tax liability within the 60 day period, the purchaser will not be liable for any outstanding tax liability of the seller.
The foregoing amendments are important to keep in mind for parties contemplating the purchase of a Michigan business, as they provide benefits and safeguards previously not available.