LeapLaw's Tax Certificate Best Practice Summary

Tax Certificates
Best Practice Summary

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Note: Obtaining any tax clearance, tax good standing certificate or tax lien waiver certificate can be a time-consuming process. In some states, obtaining these certificates can take up to six months. It is, therefore, important to:

(a) Get as much lead time as possible.

(b) Let the attorney you are working for know how long it will take so that deal arrangements can be made. Commonly, if the certificate will take an excessively long time, it becomes a post-closing matter rather than a condition of the closing itself. It is important that the attorney negotiate this as early as possible.

A franchise tax is imposed on corporations, limited liability companies and other businesses in the states in which it is incorporated or qualified (in the case of corporations) and formed or registered (in the case of limited liability companies). This tax may be referred to as excise tax others or franchise tax. Rates of taxes also vary from state to state.

Assumed Par Method

Delaware's franchise tax for corporations is assessed on their annual reports, which are due by March 1st each year for the prior calendar year. Limited liability companies and limited partnerships pay a flat tax annually payable by June 1st. A client may receive an annual report that states several thousands of dollars of tax due when the computation is based the company's authorized shares. The total assessed by the state may be drastically reduced by using the alternate calculation method, known as "assumed par value method". You may use the Delaware Franchise Tax Calculator or your preferred service company may assist in the calculation.

Most states, however, require departments of revenue to provide a tax good standing certificate as a separate certificate evidencing that all excise and/or franchise taxes has been paid. In these states, if taxes are not paid, it generally will not affect the status of the company on the secretary of state records.

Corporations and other organizations will periodically require evidence of tax good standing from their local departments of revenue (DOR) or other franchise or corporate tax collector, particularly during certain transactions such as a credit facility or sale of assets. Generally, you will need to request a tax good standing certificate in writing and send it to the appropriate DOR.

The DOR issues either a certificate or request further information to assure that the company is in full compliance.

Best Practice Tip: Some states, such as Delaware, attach franchise tax to the good standing of the business entity. Therefore so long as annual reports are current, the company is also considered to be in tax good standing. In Delaware there is no need to obtain a separate tax good standing certificate from the DOR.

However, you can request a tax good standing from the Delaware Department of Revenue if the company files corporate income tax returns in the state. Since most Delaware companies do not actually conduct business in the state, they do not file income tax returns in Delaware. If you do need to order this certificate, you will need the company's federal identification number and it can be ordered by your preferred service company.

Other than in the State of Delaware, a certificate of tax good standing should not be confused with a certificate of good standing as issued from the secretary of state. Tax clearance certificates or tax good standing certificates may be required as a condition to a transaction or in connection with a dissolution or withdrawal of a corporation, limited liability company or other business entity.

Typically, a tax good standing certificate must be requested in writing from the appropriate state agency by an officer of the company. You may want to include a state-approved power of attorney so that you may obtain the certificate and/or obtain updates on the issuance of the certificate. For more information on requirements for obtaining tax good standing certificates in particular states, contact your preferred service company.

Corporations may require certificates of tax good standing as a condition to a financing or to other business transactions. In order to obtain a certificate of tax good standing, a corporation will generally send a letter or file an application with the state DOR or the equivalent thereof. The letter or application must be signed by an officer of the company and will generally include the following:

Name of the company
Full address and daytime phone number;
Types of taxes to which the company is subject and the corresponding state or federal identification numbers;
Any outstanding tax returns and payments to which the company is subject;
A copy of the IRS 501(c) determination letter from the federal government if the requestor is a non-profit corporation (if appropriate;
Power of attorney (may be a state preprinted form) for any third parties with whom this matter may be discussed.
Signature of a company officer (preferably the treasurer in many states).

Sample Tax Good Standing Request

A waiver of corporate tax lien may be needed for the sale or transfer of all or substantially all of company's assets and is issued by state revenue departments certifying that the company or individual has no current tax liens. It is typically requested in writing by an officer of the company. To request a lien waiver, generally a request letter or file an application will be submitted to the appropriate DOR. The letter or application must be signed by an officer of the company and will generally include the following:

Name, full address, daytime phone number;
Signature of an officer of the transferor;
Any outstanding tax returns and payments still due for any tax to which the company is subject;
Types of taxes to which the company is subject and the corresponding state identification number(s);
Date of proposed or past transfer or sale;
Name and address of transferee;
Description of assets to be sold. If real property in involved, provide a legal description of the property. If the transfer has already taken place, list registry book and page number;
Price, terms and conditions of the proposed or actual sale or transfer;
Power of attorney (may be a preprinted state form) for any third parties with whom this matter may be discussed.

Sample Tax Lien Request

When taxes are past due and payable to the IRS and state governments, tax liens may be filed against the company at the local federal district court for federal taxes or at the secretary of state's office for state taxes.

Due diligence may require that federal and state tax lien searches are performed on the entity. You may request these searches through your preferred service company. If a client has a federal tax lien that should be or should have been released, the release may be requested pursuant to Section 6325(a) of the Internal Revenue Code (IRC) and IRS instructions.

Letters of compliance are issued to individual businesses, trusts and partnerships, limited liability companies and limited liability partnerships and other unincorporated entities. A letter of compliance will also be required to be a written request or an application with the appropriate DOR. The letter or application must be signed by a legal representative of the taxpayer and must include the following:

Name of the entity
Full address, daytime phone number;
List the types of taxes to which the organization is subject and the corresponding state and federal tax identification numbers;
Identification numbers of trustees, partners or proprietors, whichever is applicable;
Any outstanding tax returns and payments to which the organization is subject;
Signature of a corporate officer or legal representative of taxpayer;
Power of attorney (on a specific state-required form) for any third parties with whom this matter may be discussed.

Depending upon the state, tax certificates may also be required in order to dissolve or withdraw a company and are also requested by sending a request letter or filing an application with the DOR.

>Note: In some states, tax good standings can be obtained but should not be used as tax clearance certificates for dissolving or withdrawing a company, i.e. Texas issues tax good standing certificates that specifically state they are not good for dissolving or withdrawing an entity. Obtaining tax clearance to dissolve or withdraw is generally a separate process from ordering a tax good standing and may require different and/or additional forms.

The letter or application must be signed by an officer of the company and must include the following:

Name of the company or business entity;
Full address and daytime phone number;
Mailing address of company, state in which the company was organized, date the company registered in the particular state, date the organization intends to cease operations in the state;
List the types of taxes to which the organization is subject and the corresponding state and federal tax identification numbers;
Any outstanding tax returns and payments to which the organization is subject;
Signature of a corporate officer;
Power of Attorney for any third parties with whom this matter may be discussed.

A power of attorney is a written instrument authorizing one person to act as an agent on behalf of another person (the "grantor") for a specific amount of time and/or for a specific purpose. The person assuming a power of attorney does not have to be a licensed attorney.

The Internal Revenue Service requires an IRS Form 2848 (PDF), power of attorney or Form 8821 (PDF), Declaration of Representative to be filed with the IRS in order to obtain any tax information on behalf of a client. Some states have their specific preprinted forms that may be required as well in order to allow a third party designee to obtain tax related information.

Tax Certificates Best Practice Summary

Tax Certificates
Best Practice Summary