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Best Practices: “Hidden” Liens – Corporate Tax Lien Certificates

By Sharon Brown, Esq.  

     Even the most sophisticated lenders sometimes ask, “What are Corporate Tax Liens?” It is not surprising that statutory Corporate Tax Lien Certificates Liens are often missed by Lenders or are confused with tax lien and judgment searches and certificates of good standing, because the concepts between the items are related. The terminology and availability of Corporate Tax Lien Certificates (“CTLCs”) vary from state to state. Whenever available, CTLCs are usually an important tool to confirming that lenders will achieve desired lien positions on loan collateral. When lenders are participating in a Small Business Administration (“SBA”) loan program, achieving the lien position required by the SBA Loan Authorization is critical to protecting the SBA loan guaranty. A better understanding of CTLCs will come from: (1) understanding what information CTLCs provide, (2) how CTLCs are distinct from tax lien and judgment searches and good standing certificates, and (3) understanding the administrative challenges sometimes encountered when requesting CTLCs.

     What CTLCs Are.   CTLCs are a search of a state’s records for outstanding taxes that are indexed against a business entity. Understanding the records that CTLCs cover is key. CTLCs are not a search of public land records, such as a county recorder’s office in which a mortgage or other liens would be filed. CTLCs are a search of a state’s taxing authority’s records, such as a Department of Revenue or Taxation. CTLCs are ordered in the state(s) in which the business entity was formed. CTLCs may identify outstanding taxes such as corporate, sales or franchise taxes due to the state. Such outstanding taxes often have not yet been reduced to judgments and indexed against the company, so at first glance the taxes would not seem to impair the Lender’s lien. The catch, however, is that many state laws provide that such outstanding taxes have statutory priority over all prior recorded mortgages, liens, claims and judgments. For example, Pennsylvania’s law giving “superpriority” to state taxes is found at 72 P.S. § 1401. In Pennsylvania, the lien for such taxes is effective as of the date of assessment, and no judgment lien need ever be filed. Id.

     Distinguishing CTLCs from Other Searches.   Since names for CTLCs vary from state to state, this often results in CTLCs being confused with tax lien and judgment searches and/or good standing certificates. Tax lien and judgment searches are a search of local public records, for tax liens or judgments filed or recorded against a person, entity or property. Again, CTLCs are a search of a state taxing authority’s records, and any outstanding taxes shown on a CTLC may have superpriority over other liens recorded in the county records. CTLCs are also frequently confused with certificates of good standing. Certificates of good standing are typically issued from the state office in which one must file to form a business, which is often the office of the Secretary of State. A certificate of good standing provides that a business’ required paperwork is in order, e. g., all annual reports and other filings are current. CTLCs, by contrast, are usually a certification from a state’s taxing authority, and indicates whether the business owes any taxes to the state. One frequent source of confusion is that in some states, CTLCs are called “Certificates of Good Standing,” but the key is that such a certificate comes from the state’s Department of Revenue or other such taxing authority.

     Administrative Challenges in Ordering CTLCs.   Procedures and turnaround times for ordering CTLCs vary significantly from state to state, although fees are usually nominal. It is important to note that some states can take as long as four weeks to process CTLCs. For these reasons, CTLCs should be obtained early in the loan documentation process to ensure that the request will not delay closing. For example, in Pennsylvania, one only needs to submit the business entity name and a small fee to obtain a CTLC from the Department of Revenue, and turnaround is approximately one week. By contrast, some states require businesses to submit a letter or power of attorney before tax information will be released to a third party (respectively Oregon and Colorado). In Michigan, tax information may only be released to the business itself.

     In the current economic climate where states are looking for every available tool to increase revenue collections, CTLCs are a valuable tool for lenders to ensure that they achieve their required lien positions. This is especially important when the loan is an SBA Loan and achieving the required lien is central to protecting an SBA loan guaranty. Clarifications of what CTLCs are and distinguishing CTLCs from tax lien judgment searches and from Secretary of State good standing certificates are keys to avoiding misunderstandings during due diligence collection. As long as the administrative challenges of ordering CTLCs are anticipated and addressed, one will have the full benefit of the simple, inexpensive and vital benefit of CTLCs.

 

For more information regarding Corporate Tax Lien Certificates, please contact Sharon at SBrown@starfieldsmith.com
or (215) 542-7070.

 

       

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