What is the tax rate when a new owner acquires an existing business, or businesses merge?

If a new owner acquires the organization, trade, or business, or 75% or more of the assets, of an existing business, and the existing business was an employer liable for the payment of Michigan unemployment taxes, then the new business becomes a liable employer. A business can acquire another business by a sale, or through foreclosure, lease, bankruptcy, or merger. The new owner is known as the successor, and this process of acquiring an existing business is called successorship.

The new or existing business also becomes responsible for the payment to the UIA of any unpaid unemployment taxes and interest owed by the old business, up to the reasonable value of the assets acquired.

Either the purchaser or seller may request from the UIA, in writing, not less than 10 days before the transfer of business, a Clearance of Account as to any amounts owing to UIA. Once UIA gives this Clearance of Account to a person, it will stand behind the accuracy of such clearance.

By law, the seller must provide the buyer with certain unemployment insurance information at least two days before an offer to purchase is accepted. On UIA 1027, Business Transferor's Notice to Transferor of Unemployment Tax Liability, the seller must give information about the business's unemployment tax rate, outstanding liabilities, and other details about jobless benefit payments and taxes. The seller must also list for the buyer employees laid off in the year before the sale and give the names of all current employees. The seller and his/her agent face civil and criminal penalties for failing to give the buyer this information. The UIA Tax Office will provide this information, upon request, to the seller in a printed format.

If a new or existing business acquires 75% or more of the assets of another business, and within 12 months either continues the previous or a similar business, or uses the trade name or good will of the previous business, then there is a mandatory transfer of the unemployment tax experience, or history, of the previous business.

This tax experience, or history, includes benefit payments charged against the old business, and tax payments made by the old business. It is very important you understand that when a new employer inherits this experience, or history, from the old employer, this really means that the new business is inheriting all the ingredients of the employer's tax rate. This also means that if unemployment benefits are being paid to former employees of the old business, any benefits chargeable to the old business will, in fact, be charged to the new employer's account.

If a new or existing business acquires less than 75% of the assets of an existing business, then there can be a voluntary transfer of the unemployment experience of the previous business. This may be to the advantage of the new business if the previous business had a low unemployment tax rate.

In order to effect a voluntary transfer, the UIA must be notified of the transfer of assets within 30 days after the end of the calendar quarter in which the transfer occurred, and the Agency must receive a written request from both the old and new businesses requesting the transfer of the account. If there is a less than 75% transfer of assets and the same controlling interest exists, a transfer of rating account will also occur (mandatory).

If there is a transfer of business (whether mandatory or voluntary), a portion of the unemployment tax history of the previous employer, including payroll, unemployment tax payments, and benefit charges, will be merged into the account of the new employer and will become part of the new employer's experience. (As you can see, this is more involved than just computing the average rate of the two employers.)

The amount of the previous employer's experience that will transfer is based on the amount of payroll (paid for the four completed quarters before the transfer) associated with the assets transferred to the new business. If the payroll associated with these assets is less than 100%, then the transfer of experience is called a partial transfer.

As an example, if a transfer of business (whether mandatory or voluntary) involved the transfer of assets associated with a certain percentage of the payroll, such as 60%, then 60% of the unemployment experience of the former employer would transfer to the new business. This means that 60% of the payroll, 60% of benefit charges, and 60% of tax payments attributed to the old employer would transfer to the new employer. The tax rate of the new business will be based on all of those experience factors that have transferred, plus any applicable experience of the new owner. The former owner's experience is reduced by the amount transferred and a tax rate is assigned based on the new experience factors.