Do I need a tax clearance certificate to sell my hotel?

A hotel is unusual among commercial properties: its main revenue line carries a tax it collects and holds for someone else. Florida levies 6 percent of the total rental charged for living quarters in a hotel.^[5] Texas sets its state hotel occupancy tax at 6 percent of the cost of a room.^[6] That money was never the owner's, and an owner who spent a slow quarter's collections on payroll still has the balance sitting there at closing.

So the buyer's lawyer asks. California requires a successor who buys the business of a person liable under the Sales and Use Tax Law to withhold enough of the purchase price to cover the amount, until the former owner produces a receipt showing it was paid or a certificate stating that nothing is due.^[1] Texas does the same under Tax Code section 111.020, and the Comptroller states the result: close escrow without a Certificate of No Tax Due and the purchaser is liable for the unpaid taxes up to the purchase price, including any assumption of indebtedness.^[2] Florida makes a transferee of more than 50 percent of a business jointly and severally liable with the seller.^[3] New York calls it a bulk sale and runs it through its own notice procedure.^[4]

The tax on your gain is a different question, answered at what taxes do I pay when I sell a hotel?.

One document, four names. California issues a tax clearance certificate through the CDTFA.^[7][8] Texas issues a Certificate of No Tax Due.^[2] Florida calls it a receipt or a certificate of compliance.^[3] New York issues Form AU-197.1, a purchaser's release.^[4]

New York is the fastest. The purchaser files Form AU-196.10 at least 10 days before paying for or taking possession of any business assets, whichever comes first. Within five business days the department sends either the release or Form AU-196.2, a notice of claim, and after a claim it tells both sides the amount due within 90 days of the original filing.^[4] Texas requires a joint request from seller and purchaser on Form 86-114, signed by both. With no audit it usually issues in 10 business days; with one it can take 90.^[2]

California runs a release clock instead. The purchaser is freed from the duty to withhold if the CDTFA neither issues the certificate nor mails notice of the amount due within 60 days after the latest of three dates: the written request, the sale, and the date the former owner's records are made available for audit.^[7][8] Florida's audit route has to finish within 90 days after the records are made available.^[3] The pattern in those two is worth reading twice. The clock starts when your records are ready, not when a buyer asks, which makes a messy set of books the delay. Those records are the first item on the list at what documents do I need to sell my hotel?.

California makes a purchaser who fails to withhold personally liable for the amount, to the extent of the purchase price valued in money, enforceable for three years after the state is notified of the purchase.^[7] The regulation adds that the liability reaches taxes, interest and penalties incurred by the predecessor or any former owner, including penalties for negligence or fraud, even if not yet determined against the seller.^[8] Florida caps a transferee at the fair market value of what was transferred or the total purchase price, whichever is greater.^[3] New York lets the purchaser pay the state out of escrow up to the purchase price or the fair market value of the assets, whichever is greater.^[4] Texas sets the ceiling at the purchase price including assumed debt.^[2]

Notice what none of those sentences does. None caps the buyer at the tax. A buyer's counsel sizing an escrow works against the statutory ceiling rather than against your estimate of the arrears, and no public source publishes what hotel buyers actually hold back. It is negotiated, and the only reliable way to make it small is to arrive with a clean account.

Two mechanics matter before you sign. In Florida a transferee that withholds has to pay the state within 30 days after the transfer, and if it withheld less than the liability you remain liable for the difference.^[3] In New York a purchaser that receives a notice of claim is told to place the full purchase price in escrow until the review ends.^[4] That is the sentence that surprises sellers, and it is the reason to file the notice early.

California's regulation on the sale of a business names hotels directly. Operators of service enterprises such as hospitals, hotels, theaters and schools may make sales incidental to their primary service business, and the regulation's own example is that a hotel may operate a restaurant and a bar. Then the operative line: if any of these businesses were sold, tax would apply only to the gross receipts from the tangible personal property held or used in the selling activity.^[10] On that reading the restaurant and bar equipment sits inside the taxable measure and the guest room furniture used in the lodging service does not, unless the seller made enough other sales to require a permit for them. The regulation's general rule is three sales for substantial amounts in 12 months.^[10]

New York draws the line by asset class instead. A purchaser in a bulk sale owes the sales tax due on tangible personal property it acquires, and the bulletin says plainly that the tax is not imposed on inventory acquired for resale, on real property, or on intangible assets such as goodwill.^[4]

No public source publishes a national rule, because there is not one. What both states share is that the number comes from the allocation in your purchase agreement, drafted long before anyone computes a tax on it. How that allocation is made is at how do I make an offer on a hotel?.

Section 1445 requires the transferee to deduct and withhold a tax equal to 15 percent of the amount realized on a disposition of a United States real property interest by a foreign person.^[11] The IRS states the same rate and notes it was 10 percent before February 17, 2016.^[12] Read it twice: the computation runs on the amount realized, not on the gain, so on a long-held hotel the withholding can exceed the tax by a wide margin.

There are two ways out. A domestic seller gives the buyer an affidavit stating under penalty of perjury that the transferor is not a foreign person, with a United States taxpayer identification number.^[11] A foreign seller applies for a withholding certificate on Form 8288-B, which the IRS issues where the amount otherwise withheld exceeds the transferor's maximum tax liability, generally acting within 90 days of a complete application; a seller who applies must tell the buyer in writing on the day of or the day before the transfer.^[13] Without a certificate the transferee files Form 8288 with the tax by the 20th day after the disposition.^[14]

California withholds from sellers it can reach, not only foreign ones. The transferee of a California real property interest withholds 3 1/3 percent of the sales price unless the seller elects in writing to certify a gain-based amount. Nothing is withheld below a $100,000 sales price, and a seller can certify out for a principal residence or for a like-kind exchange to the extent gain is not recognized under section 1031.^[15] That route is at can I do a 1031 exchange without buying another hotel?. One mercy in the same statute: an escrow company may not charge more than $45 for handling it.^[15]

New York's answer is the cleanest. Its bulletin's own example says a purchase of all the issued and outstanding stock of a company required to collect sales tax, where both companies continue to exist as separate legal entities, is not a bulk sale, because the business assets were never transferred.^[4] Florida reaches further: a business is considered transferred when more than 50 percent of the business, its assets or its stock of goods changes hands, so an equity deal can still be a transfer.^[3]

Washington is the warning. There, a sale includes the transfer or acquisition within any 36-month period of a controlling interest in an entity with an interest in real property in the state, and acquisitions by persons acting in concert are aggregated.^[16] A controlling interest is 50 percent or more of a corporation's voting power, or 50 percent or more of the capital, profits or beneficial interest in any other entity.^[17] The Department of Revenue requires a controlling interest transfer return within five days of the completed transfer, with penalties and interest if the return and tax are not in within one month.^[18] The state rate reaches 3.0 percent on the portion of the selling price above $3,025,000, and those brackets step up to $551,000, $1,551,000 and $3,051,000 for sales beginning January 1, 2027.^[18]

So an entity sale changes which statute applies, not whether one does, and the test is run where the hotel sits.

The CDTFA tells a seller to close out its permits and accounts when it sells the business, file final returns, report sales of fixtures, equipment and retained inventory, and keep records for four years after closure. It also warns that a predecessor who does not notify the agency can be held liable for amounts a successor incurs.^[9] Florida requires a final return and full payment within 15 days after the date of transfer.^[3] New York gives a seller that stops operating 20 days after operations end.^[4]

Then the part sellers get wrong. Clearing the buyer does not clear you. Texas says only the purchaser is protected by a Certificate of No Tax Due, and the seller remains responsible for all tax, penalty and interest from before the date of sale.^[2] New York says the seller stays liable whether or not the purchaser was relieved.^[4]

One thing you cannot do alone: Texas requires a joint request, so the certificate cannot be ordered before there is a buyer.^[2] That splits the work. The account cleanup belongs in the months before you list, with the rest of the preparation at how do I sell a hotel?. The certificate belongs inside the contract period, where it competes with everything else on the clock at how long does it take to sell a hotel?.

Guide

What is involved in selling a hotel?

Other questions in this guide

• What taxes do I pay when I sell a hotel?
• What documents do I need to sell my hotel?
• What is the step-by-step process for selling a hotel?
• How long does it take to sell a hotel through a broker?
• Can I do a 1031 exchange without buying another hotel?

Terms defined in the glossary

• Going-Concern Value
• FF&E Reserve
• Prime Rate

Our own data

• Matthews Hotel Markets rate sheet