Worse Than Vermin: Restaurant Buyer Gets Stuck With Seller’s Unpaid Sales Tax Tab

You wouldn’t buy a restaurant or bar without doing a “walk-through,” checking staff and clientele and kicking the floorboards for rats or cockroaches. But you should also kick the financial floorboards for unpaid sales taxes. A restaurant buyer learned this the hard way in Appeal of Skewers Lebanese Food (Cal. Office of Tax Appeals No. 240917430, March 27, 2026) when the California Office of Tax Appeals (OTA) sided with the California Department of Tax and Fee Administration (CDTFA) and held that the buyer was liable for the seller’s unpaid sales taxes as the successor to the business.

Background

A restaurant or bar owner must have a “seller’s permit” from the CDTFA (or, as the CDTFA calls it, a Sales and Use Tax License) and pays sales tax on meal and drink orders. (It is a common misconception that the customer pays the tax but actually the owner does, though the owner can include a separate charge for “reimbursement” of the sales tax on the customer’s tab.) If a person with a sales tax liability sells his or her business or stock of goods, then under California law the buying “successor” must withhold enough funds from the purchase price to cover these taxes unless the buyer gets one of the following “get out of jail free cards”:

• the buyer gets from the seller a CDTFA-generated receipt or certificate showing the tax liability has been paid; or
• the buyer obtains a tax-clearance certificate from the CDTFA stating that no taxes, interest, or penalties are due from the seller.

If the buyer does not obtain either document and there are indeed unpaid sales taxes (whether or not the seller discloses during purchase negotiations), then the buyer is directly liable for the amount that should have been withheld up to the purchase price. The liability extends to taxes owed from operating the business by the seller or any former owner, even if the CDTFA has not yet determined those and includes interest and penalties.

The OTA Decision in Skewers Lebanese Street Food

The appellant buyer in Skewers Lebanese Food had signed a lease agreement for a small restaurant space in Huntington Beach with Fainbarg I, L.P. The same space was previously occupied by Terranea Foods doing business as Skewers Lebanese Street Food (Terranea Foods). Appellant and Terranea Foods entered into an Asset Purchase Agreement (APA) in June 2022 for this business. The APA provided as follows:

• Appellant was purchasing the business’ tangible (fixtures, equipment, furniture and food and beverage inventory) and intangible (name, intellectual property, customer lists, goodwill and website and phone numbers) assets.
• The purchase price was $40,000, allocated $1,500 to inventory, $8,000 for all other tangible assets and $30,500 for intangible assets.

Terranea Foods had unpaid sales tax liabilities exceeding the purchase price of $40,000 when it executed the APA, and the appellant did not withhold anything from the purchase price. In February 2023, appellant and Terranea Foods signed a Termination Agreement reciting misrepresentations by Terranea Foods as to the unpaid sales taxes and purporting to unwind the sale of the business; however, appellant kept and continued to operate the business, and Terranea did not return the purchase price.

The CDTFA issued a Notice of Successor Liability (NOSL) to appellant in June 2023 claiming appellant was liable for Terranea Food’s unpaid sales taxes. With back taxes, collection costs and other items, the total NOSL was a little more than $35,000 – close to the $40,000 purchase price. The OTA upheld the NOSL and held, basically, that the appellant was sheer out of luck: the statutes and regulations were clear here, there were unpaid sales taxes, the buyer hadn’t obtained a tax clearance from the CDTFA, and the buyer hadn’t withheld funds from escrow during the APA transaction. The OTA gave short shrift to the buyer’s argument that the purpose of the APA was to coax Terranea Foods out of the leased premises and not to buy the business: On the contrary, the OTA said the APA provided that appellant was in fact buying the restaurant business. (There was also a procedural dispute as to whether the CDTFA had properly determined the amount of the NOSL and there, again, the OA held against the appellant-taxpayer.)

Key Takeaways

• An asset sale doesn’t automatically shield from liabilities. If one acquires a restaurant or bar business by buying the equity in the entity, then the buyer always steps into the shoes of the seller as to tax and other liabilities because the buyer is acquiring the entire entity itself and not just “cherry picking” various assets. But, as Skewers Lebanese Food shows, an asset sale doesn’t always mean that the buyer escapes liability for the seller’s debts. The buyer must be mindful of statutory and other local law which, as here, can impose successor liability for unpaid taxes and other debts.
• Do your due diligence. As we said at the start of this article, you wouldn’t buy a restaurant or bar without checking for rats or cockroaches but there can also be financial “cockroaches” in the form of unpaid taxes and other debts. An exterminator can eliminate vermin; however unpaid sales taxes are much harder to ”kill” once a deal closes. So, financial as well as physical due diligence is critical when buying any business, and especially a bar or restaurant. Ask the seller early on whether there are any unpaid sales taxes, government examination reports, or other tax related dispute matters with any state or local taxing authorities and document this in writing. Buyers should treat tax review and clearances as they would with reviewing leases, liquor license status, health permits, employment issues and condition of the assets being purchased.
• Get a tax clearance. Robust due diligence involves effort and fees and may not always be practical (as, in Skewers Lebanese Food where the purchase price was only in the mid-5 figures). Nevertheless, California law does provide a quick and inexpensive way to do sales tax due diligence by applying online to the CDTFA for a tax clearance. Had the buyer in Skewers Lebanese Food applied, the CDTFA would have said “not clear”, and the buyer would have known there was an unpaid sales tax issue and could have withheld accordingly. Start the process as early as possible; obtain and include tax-clearance certificates from CDTFA or any other taxing authorities, as part of the transaction closing checklist.
• Address tax issues in the purchase agreement. Expressly address tax matters in the purchase agreement, including representations, warranties, covenants to cooperate on clearance, indemnity language and delivery of tax-clearance documentation. Also, having clear conditions in the purchase agreement and paying attention to the successor-liability rules will go a long way towards preventing unpleasant post-closing surprises.
• Do an allocation. The OTA’s opinion recites that the parties did a purchase price allocation which, though not central to the issues in its decision, does demonstrate best practices in an asset sale -- because it helps the parties determine the sales tax owed on the sale of the business itself. Here, the seller would have owed sales tax on the $8,000 for tangible assets (other than inventory), but not on the $30,500 for intangible assets or on the $1,500 for inventory (so long as the buyer furnished a certificate to the seller to the effect that the buyer was acquiring the inventory for resale to customers). The CDTFA usually respects allocations like this because the two sides have different interests and are dealing at arm’s length. (Many states, but not California, would also not apply sales tax to the $8,000 for tangible assets other than inventory on the theory that this was a “one-time” sale.)
• Withhold from the purchase price. Withhold appropriate funds from the purchase price while in escrow until the CDTFA confirms seller’s tax liabilities or issues a tax clearance.