What is successor liability in an acquisition?

Successor liability is the legal doctrine that can make a buyer responsible for the seller's unpaid taxes even after the deal closes — most commonly in a stock sale, but sometimes in an asset sale under state successor-liability and bulk-sale rules. Unpaid sales tax, payroll tax, and state income tax can follow the business to the new owner. Diligence exists to find that exposure before closing so it can be fixed, escrowed, or priced.

Why does sales tax nexus matter when buying a business?

If the target sold into states where it had economic or physical nexus but never registered or collected sales tax, it has an accruing, often unrecorded liability — plus penalties and interest. After the 2018 Wayfair decision, economic nexus can be created by sales volume alone, with no physical presence. A buyer that inherits this exposure can face years of back tax. Diligence maps where the target had nexus versus where it actually filed.

How do reps, warranties, and indemnities protect a buyer on tax?

Tax representations in the purchase agreement are the seller's promises that returns were filed, taxes were paid, and there are no undisclosed audits or liabilities. If a rep turns out to be false, the indemnity clause lets the buyer recover — often from an escrow holdback or through representation-and-warranty insurance. They don't replace diligence; they backstop the risks diligence surfaces and allocate the ones it can't fully resolve.

What are the most common tax problems found in due diligence?

The recurring ones are unfiled or late returns, unregistered sales-tax nexus in multiple states, worker misclassification (contractors who should be W-2 employees), payroll-tax deposit failures, unsupported or aggressive deductions, and open or unresolved audits. Each can carry back taxes, penalties, and interest that follow the business — which is exactly why they're the focus of pre-acquisition tax diligence.

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M&A Tax

Tax Due Diligence Before You Buy a Business: What to Uncover Before You Sign

The tax problems that sink an acquisition are the ones you inherit silently — successor liability, unfiled returns, and unregistered nexus. Here's the diligence that finds them before they become your problem.

SMAART Tax Team

March 9, 2026

6 min read

|Reviewed by Ray Dominguez, EA, USTCP