Beware of the M&A Trigger for Sales Tax Audits
If you are selling your business in California and you have a sales tax account with the CDTFA, there’s a critical step you need to know about: requesting a tax clearance certificate.
While this step is often seen as routine in a mergers and acquisitions (M&A) process, it carries a hidden risk. Requesting a clearance can sometimes trigger an audit, putting sellers under scrutiny at the very moment they are trying to close a deal.
What Is a Tax Clearance Certificate?
When a business is sold, the buyer typically requests a tax clearance certificate from the state.
Why Buyers Want It
The certificate confirms that the business has:
- No open audits
- No unresolved tax issues
- No outstanding balances
This gives the buyer peace of mind that they won’t inherit the seller’s liabilities once the transaction is complete.
How Clearance Requests Trigger the M&A Audit Risk
While the certificate is designed to protect the buyer, it can also alert the CDTFA to take a closer look at the seller.
Why the State Takes Action
Once a business changes hands, it becomes much harder for the government to pursue the prior owner for unpaid sales tax or past filing errors. To avoid missing that opportunity, the CDTFA may decide to audit before the transfer is finalized.
This is often called the M&A trigger because it arises specifically during business sales. By requesting a clearance, you may inadvertently invite an audit of prior years.
Insights Directly From the CDTFA
At Milikowsky Tax Law, we’ve seen this scenario play out with clients selling their businesses. In fact, an auditor with the CDTFA confirmed to us that clearance requests during an M&A process can prompt additional review.
For sellers, this means that what seems like a simple administrative step could create significant risk.
What an Audit Could Mean for You
A sales tax audit during a business sale can complicate and delay the closing process. Even worse, it can uncover liabilities you weren’t expecting.
Potential Outcomes of a Triggered Audit
- A deeper review of prior years’ sales tax filings
- Additional documentation requests that stall the sale
- Assessments of unpaid sales tax, interest, and penalties
- Added pressure on you as the seller to resolve issues quickly
An audit at this stage doesn’t just increase costs — it can affect negotiations, reduce the sale price, or create stress during an already complex transition.
How to Protect Yourself
If you’re preparing to sell your business in California, don’t wait until the clearance request to get your sales tax house in order.
Steps to Take Before the Sale
- Review your sales tax filings for accuracy
- Reconcile records to confirm reported sales match documentation
- Address any unpaid balances or errors proactively
- Work with an experienced tax attorney to identify red flags before the buyer or state does
By preparing in advance, you reduce the risk of an unpleasant surprise during the M&A process.
Why Experience Matters
Navigating the M&A trigger requires more than filling out forms. An experienced tax attorney understands how the CDTFA approaches clearance requests, what documentation auditors look for, and how to resolve issues efficiently.
With proper guidance, you can enter the sale process confident that an audit won’t derail the transaction or add unnecessary liabilities.
Bottom Line
If you’re selling your business in California, be aware of the M&A trigger. A tax clearance certificate may reassure the buyer, but it can also open the door to an audit. Preparation is the key to protecting yourself and ensuring your sale closes smoothly.
At Milikowsky Tax Law, we help business owners get ahead of these risks so that selling their business doesn’t come with unexpected complications.