Get a DC Clean Hands Certificate Before You Sell

One page, two agencies

The Certificate of Clean Hands comes from the Office of Tax and Revenue (OTR). You request it through MyTax.DC.gov, and there is no fee.

It shows two things. First, that your business has filed the DC returns it is required to file. Second, that it does not owe more than a small amount in DC taxes, fees, fines or penalties.

The debts it looks at are not only tax debts. Money owed to the Department of Employment Services (DOES), such as unemployment insurance contributions, counts too. A company can be current with OTR and still be blocked by an old DOES balance.

You may see different dollar thresholds quoted in different places. Do not plan around a number. Plan to owe nothing, and confirm with OTR if you are unsure where you stand.

This guide is for companies located in the District. A company based in Maryland or Virginia follows that state's rules instead.

Why a buyer wants to see it

A buyer of a District company worries about two things on the tax side: old debts that could follow the business, and delays at closing.

In an asset sale, the buyer must also send OTR a bulk sale notice at least 15 days before paying.

A buyer who skips that notice can be held responsible for your unpaid DC taxes. A clean certificate from you makes that step feel routine instead of risky.

So buyers often ask the seller for a current certificate before closing. It is a simple form of proof. It also tends to make the buyer more relaxed about how much of the price it holds back in escrow.

If your buyer is using an SBA 7(a) loan, expect the lender to ask about anything that could cloud the deal, and DC tax debts are an easy thing to ask about.

When the certificate will not issue

A refusal is not a disaster. It is information, and it is far better to get it six months before closing than six days before.

The usual causes are small and fixable:

• A return that was never filed, often for a period when the company had no tax due.
• A late payment that left penalties and interest behind.
• An unemployment insurance balance with DOES that nobody noticed.
• An annual personal property return that stopped being filed after a change in staff.

Ask your CPA to work through each DC account and match it against what OTR and DOES show. Once the gaps are filed and paid, request the certificate again.

The personal property return catches a lot of owners. Businesses in DC with furniture, equipment or computers file the FP-31 every year, even when no tax is due. Our FP-31 guide covers the final one you file after a sale.

The buyer needs its own, too

Clean Hands is not only a seller's document. The Department of Licensing and Consumer Protection (DLCP) requires it with any license or permit application, including the Basic Business License.

In an asset sale, the buyer typically applies for licenses under its own entity, so it needs its own clean certificate. If the business is moving to a new address, a new Basic Business License is needed for the new premises in any case.

Whether a particular license must be reissued after a change of owner depends on the license and on how the deal is structured. That is a question for DLCP, and for your attorney. Do not assume either way.

Timing that works

Pull the certificate when you first decide to sell, before a broker markets the company. That gives you time to clean up quietly, without a buyer watching.

Pull it again during diligence and hand it over with your financial statements and tax returns. Then expect to pull a fresh one close to closing if the buyer or lender asks.

Keep paying and filing on time through the closing date. A missed sales tax or withholding payment in the final month can undo a clean certificate you worked to get. After closing, your DOES account and final returns still need attention.

What it does not tell a buyer

A clean certificate says your accounts with the District are in order today. It does not say anything about the business itself: its earnings, its customers or what it is worth.

Buyers look at those through your financial statements, your tax returns and how much of your revenue sits with your top few customers. That is where price is set, and where preparation pays the most.

If you want a sense of what your District company could sell for before you start on the paperwork, send a short request or call (202) 555-0174.