In Washington’s closed cannabis marketplace, we see plenty of license purchases and sales, with deals structured in many creative ways, always to maximize the likelihood of regulatory approval from the Washington Liquor and Cannabis Board. Washington’s cannabis regulations are among the most stringent, consistent with Washington’s Department of Revenue’s application of Washington’s taxation statutes.

Generally, if a buyer wants to avoid successor liability issues when buying a cannabis business, the buyer will structure the deal as an asset purchase rather than a stock purchase (for a corporation) or a membership interest purchase (for an LLC). But in Washington, even a buyer needs to be aware of how to minimize the likelihood of successor tax liability.

Washington has some peculiarities that apply even in asset sales, as I explain below.

Sales Tax and Exemptions

Washington imposes retail sales tax on the portion of the purchase price allocated to tangible personal property, with some exceptions. Exceptions to this include (a) inventory for resale, as long as the buyer provides a reseller permit/resale certificate to the seller, and (b) machinery and equipment for manufacturing use, as long as the buyer provides a machinery and equipment (“M&E”) exemption certificate to the seller.

The obligation to collect and remit sales tax is on the seller, which generally will discharge the tax by direct payment to the Washington Department of Revenue at the closing.

Additional information on reseller permits can be found here. The buyer will need to provide a copy to the seller to avoid paying taxes on assets like inventory that will be resold to consumers.

The M&E exemption certificate can be found here. The buyer will need to provide a copy to the seller to avoid paying taxes on machinery and equipment that will be used in the business.

The following chart may be helpful when trying to calculate the total taxable amount of the purchase price in an asset purchase:



Taxable Amount




Total Purchase Price




Before accounting for the below exemptions


Less allocation of intangible personal property




For consulting services, goodwill, and other intangible assets


Equals allocation of tangible personal property




To be included in the asset purchase agreement


Less inventory for resale




Requires reseller permit


Less machinery and equipment for manufacturing use$TBD


Requires M&E exemption certificate


Equals remaining tangible assets




Includes FF&E not used in manufacturing, as well as supplies


Total taxable portion of Purchase Price




Calculated based on state and local taxes, which vary significantly based on seller’s geographic location


The asset purchase agreement should include a total asset breakdown by dollar amount, which you will need that in order to fill in the chart above and calculate the sales tax applicable to your transaction.

Successor Tax Liability and How to Mitigate It

Washington holds any purchaser of more than 50% of a business’ tangible or intangible assets to be strictly liable for any outstanding taxes owed by the seller, with a few exceptions that do not apply here (see RCW 82.32.140 and WAC 458-20-216).

This successor liability cannot be avoided but can be mitigated in two ways: (a) by the buyer requiring the seller to provide a tax clearance letter (called a tax status letter in WA, attached to this email) from the WA Department of Revenue prior to closing and directly paying any outstanding taxes from the purchase price proceeds, and (b) by the buyer providing a successorship notice form to the WA Department of Revenue.

The successorship notice form provides notice to the WA Department of Revenue that it has six months from the later of the date (a) the department receives the notice and (b) the transaction closes, to assess any taxes on the seller. If the department assesses any taxes during that six-month window, then the buyer is responsible to discharge that liability (but can recoup it from the seller, if possible).

If the six-month window passes without notice from the department, then the buyer is relieved of any potential tax assessments attributed to seller’s operations. In contrast, if the buyer does not provide a successorship notice form, then the department can assess taxes against the buyer for seller’s operations to the fullest extent of the department’s statutory authorization, which is four years in normal circumstances and seven years for more egregious behavior, such as collecting but not remitting sales tax.

Because of the six-month post-closing uncertainty period regarding successor tax liability, a cannabis business buyer should hold back a portion of the purchase price for that six-month period, even if the tax status letter reflects that the seller is up to date with the WA Department of Revenue.

Often a buyer will engage a seller to consult for a few months with the buyer to ensure a smooth business transition with vendors and customers. Extending the consulting agreement term to a period of six months and holding back a portion of the purchase price for six months makes buyer’s holding back a portion of the purchase price less obviously painful to a seller. Finally, it’s always a good idea for buyers to hold back cash for other reasons; namely, to ensure all representations and warranties are accurate.

Taxes is one of the two great certainties in life. And taxation in Washington is more certain than the average state. Buyers need to be aware of this and discuss it early with the seller so that the business deal does not go sour as the transaction closing approaches.

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