Selling with tax delinquency

Can you sell a cannabis business that owes back taxes?

Yes. The sale has to account for the debt in one of three ways: pay it before closing, pay it at closing out of the price, or, rarely, have the buyer take it on with a matching price cut and the tax agency’s agreement. What you cannot do is sell around it. Liens follow the assets, statutes make buyers liable, and regulators check tax standing.

Tax debt is widespread among cannabis operators for a structural reason. Section 280E denies ordinary deductions to adult-use businesses, so federal tax can exceed cash profit, and state excise and sales taxes are collected from customers in cash and are easy to spend in a bad month. A buyer who knows the industry has seen this before. How 280E works is explained in 280E for buyers and sellers.

Which tax debts matter most in a sale?

Tax	Why it matters in a sale
Federal income tax (280E)	Usually the largest balance. Leads to a federal tax lien on all business property once assessed and unpaid. In a pass-through entity the debt may sit with the owners personally, not the business.
Payroll withholding	A “trust fund” tax. Under 26 U.S.C. 6672 a responsible person who willfully fails to pay it over owes a penalty equal to the whole unpaid amount. Selling the company does not end that personal liability.
State sales tax	Also held in trust for the state. The main trigger for buyer successor liability.
State cannabis excise or cultivation tax	Often tied to license standing. Unpaid balances can block renewal or transfer approval.
Local cannabis business tax	Cities can refuse to renew or transfer a local permit until paid.

Buyers treat the trust fund taxes as the most serious, because the money belonged to someone else and because agencies pursue them hardest.

How liens affect the sale

Federal. Once the IRS assesses a tax and it goes unpaid after a bill, a lien arises on all business property and rights to property, including accounts receivable. A filed Notice of Federal Tax Lien tells creditors and buyers it exists. Three tools matter in a sale:

• Payoff and release. The IRS provides a payoff figure and releases the lien within 30 days after full payment. This is the cleanest route: the escrow agent pays the IRS from the proceeds.
• Discharge of specific property. If the price will not cover the whole debt, the IRS can discharge the assets being sold so the buyer takes them free of the lien, typically in exchange for the sale proceeds. The application is described in Publication 783. Allow weeks for processing and apply well before closing.
• Subordination. Lets another creditor move ahead of the IRS. It is occasionally useful when a lender is financing a fix before the sale.

State. State tax agencies file their own liens. In California, a cancelled payment plan is followed by liens on the business and collection actions including levies, according to a 2022 law firm summary of agency practice. Which lien gets paid first when there is not enough money is covered in tax-lien priority in cannabis sales.

Successor liability: why the buyer cares so much

An asset purchase does not leave tax debt behind. Two examples:

• California. A buyer of a business or stock of goods must withhold enough of the purchase price to cover the seller’s sales and use tax liability until the seller produces a receipt or a certificate that nothing is due. A buyer who fails to withhold becomes personally liable up to the purchase price. The buyer protects itself by asking the California Department of Tax and Fee Administration in writing for a clearance certificate. The agency has 60 days, measured from the latest of the request, the sale, or the date the seller’s records are made available for audit, to issue the certificate or a notice of the amount due. If it does neither, the buyer is released from the duty to withhold.
• Michigan. A purchaser who does not escrow for the seller’s unpaid taxes, or obtain a clearance, is personally liable for them up to the value of what it acquired.

In a sale of the entity itself (membership interests or stock), every liability stays inside the company the buyer now owns, so the buyer’s exposure is greater and the diligence harder. Both structures are compared in asset sale vs membership-interest sale.

The practical effect: expect the buyer to demand clearance certificates where a state offers them, payoff letters for every known balance, and an escrow for what cannot be confirmed by closing.

Tax standing and regulator approval

Tax compliance is part of the transfer file in several states. Colorado’s change of owner application must include documents necessary to verify tax compliance. Where unpaid cannabis taxes put renewal at risk, the order of payment matters: state cannabis and local taxes first to protect the license, then trust fund taxes, then income tax. A license that lapses mid-sale leaves little to sell.

How deals with tax debt actually close

Illustrative. A dispensary sells for $1,500,000. The owner’s schedule shows $180,000 of state excise and sales tax, $60,000 of payroll tax, and $310,000 of federal income tax, all with liens or notices. The closing statement might read:

Item	Amount
Purchase price	$1,500,000
Paid from escrow to state tax agency	($180,000)
Paid from escrow to IRS, payroll tax	($60,000)
Paid from escrow to IRS, income tax	($310,000)
Holdback for unaudited periods, released after 18 months	($100,000)
Net to seller at closing, before other debts and costs	$850,000

The numbers are invented. The pattern is typical: the escrow agent, not the seller, pays the agencies from the proceeds, liens are released, and a further amount is held back for periods that could still be audited. Holdback sizing and release terms are covered in tax liabilities and holdbacks in a sale.

Other structures buyers use:

• Price reduction with assumption. The buyer takes on a payment plan. This is uncommon, because agencies usually must consent and most plans default on a sale.
• Seller note with offset rights. The buyer can deduct any tax it is forced to pay from what it owes you.
• Specific indemnity with personal guarantee. You stand behind pre-closing taxes after the sale. See reps, warranties, and compliance indemnities.

What to do before going to market

1. Get the facts. Pull IRS account transcripts and state account statements for every tax type. Owners often underestimate penalties and interest.
2. File everything. Unfiled returns worry buyers more than unpaid ones, because the amount is unknown and the audit period never starts to run.
3. Stop the bleeding. Get current on trust fund taxes and stay current. A buyer will forgive an old balance more easily than a growing one.
4. Consider a payment plan. In California, plans of up to 12 months are approved without financial documentation; longer plans need financial statements. A plan in good standing can keep liens and levies away while you sell.
5. Build the schedule. One page listing each agency, period, tax, penalty, interest, lien status, and payoff date. It goes in the data room with the other documents needed to sell.
6. Request payoffs and clearances early. They take weeks.
7. Disclose at the letter of intent stage. Price the deal with the debt in view so it does not collapse in diligence.

Medical operators should note that the April 2026 order placing state-licensed medical marijuana in Schedule III changes deductions going forward only. It does not erase earlier assessments.

When the debt is larger than the price

If taxes and other debts exceed what any buyer will pay, a conventional sale will not close, because liens cannot all be released. The realistic paths are a negotiated reduction with the agencies, a court-supervised receivership sale, or an assignment for the benefit of creditors. These are described in selling a cannabis business in distress. Get personal advice first on trust fund exposure, since that liability follows you whatever happens to the business.

This page is educational and is not tax or legal advice. A broker can structure and market the sale; a cannabis-experienced CPA and tax attorney should handle the agencies. To talk through whether a sale is workable with your balances, you can book a confidential intro call.