| Agency | Colorado Department of Revenue |
|---|---|
| Form or step | Tax status letter for the selling business, requested from the Department |
| Timing | Request it early in due diligence so there is time to fix anything it shows |
Watch for this: A letter only covers state taxes. City sales tax in Colorado Springs is handled separately.
Why Buyers Ask for It
When a buyer takes over a business, unpaid taxes can follow the assets in some situations. Sales tax and payroll tax are the usual worries, because those are funds collected from others and held for the state.
Colorado law firms that handle acquisitions advise buyers to require the seller to get a tax status letter from the Colorado Department of Revenue.
The letter states whether the seller owes any state taxes. With a clean letter in hand, the buyer can close with more confidence.
What the Letter Shows
A tax status letter reports whether the business has outstanding state tax balances or missing returns on the accounts the Department administers, such as state sales tax and wage withholding. It is a snapshot as of the date it is issued.
It does not cover taxes the state does not collect. Colorado Springs runs its own sales tax office, so the city account needs separate attention. See our page on the Colorado Springs sales tax license.
How to Request It
Requests go to the Department of Revenue, and the business or its authorized representative signs. Many sellers have their CPA handle the request. Processing time varies, so ask for it as soon as a letter of intent is signed.
If the letter shows a balance or a missing return, you have time to file and pay before closing instead of watching the buyer hold back part of the price.
Common Problems It Turns Up
- A quarter where a return was filed late or never filed
- A small penalty or interest balance the owner never noticed
- An old account for a closed location that was never formally closed
- A payroll period where deposits and returns did not match
Most of these are easy to fix with a few weeks of notice and painful with a few days.
How It Shows Up in the Deal
Expect the purchase agreement to require that all state taxes are paid through closing, with a clean status letter as a closing condition. Some buyers also ask for an escrow or holdback until final returns are filed.
After closing, you still file final returns and close your accounts. Our page on closing your Colorado withholding account covers payroll, and the same closure request can include state sales tax.
Unemployment Is a Separate Agency
Unemployment insurance premiums are handled by the Colorado Department of Labor and Employment, not the Department of Revenue, so the status letter will not speak to them. See Colorado unemployment rate transfer.
Sources and Next Steps
Colorado acquisition attorneys and the Department of Revenue's own published guidance describe this letter. This page is general information, not tax or legal advice, so confirm your situation with your CPA or attorney.
If you are preparing for a sale, our guide to getting your books ready is a good next read.