Sales and Use Tax – Mergers & Acquisitions
Whether a Merger or Acquisition transaction is structured as a bulk asset sale or an equity sale, states typically hold the purchaser responsible for any unpaid sales and use tax liabilities of the seller. This is commonly known as “successor liability” and it is most often the most significant sales and uses tax issue of concern in Mergers and Acquisitions. In a typical scenario, the target company has business facilities in one or a small number of states where it complies with the sales and use tax laws, but has been making taxable sales in numerous states for years where it hasn’t been collecting sales and use taxes, but arguably has had a legal obligation to do so the entire time. The potential sales and use tax exposure related to uncollected sales and use taxes can be astronomical. The buyer will want to fully protect itself and will want the seller to put enough in escrow to cover any sales and use tax liabilities that could potentially arise. The seller, on the other hand, will want to limit its escrow contribution to only cover liabilities that are likely to actually arise. The buyer will be inclined to assume that every state will conduct an audit, one hundred percent of the target company’s prior sales will be assessed and that every state will impose penalties and interest at the highest rates. The seller will want to assume that, perhaps, one or two states will audit and, if so, most of its customers will have self-assessed the use tax, penalties will likely be abated, and interest will be imposed at minimum rates.
Our professionals can help every step of the way with Merger and Acquisition related sales and use tax issues. With respect to the transaction itself, we are aware of the potentially applicable sales and use tax exemptions. We also know the common ways in which transactions can be restructured to legally avoid sales and use taxes.
With respect to successor liability, we have significant experience representing the interests of both buyers and sellers. In either case, we will typically review and quantify the target company’s potential sales and use tax exposure. If working for the buyer, we will help ensure that prior sale and use tax liabilities of the seller and expenses associated with resolving them are paid for by the seller. We will also help you get into compliance going forward. If working for the seller, we will help you negotiate more reasonable escrow requirements with the buyer, which will include devising and carrying out a plan for proactively resolving and minimizing the amount actually needed to resolve your prior period sales and use tax liabilities. The plan would typically involve entering into settlement agreements with key states where significant exposure exists. The anticipated benefits of such agreements typically include limitation of the prior look back period, abatement of penalties and imposition of minimum interest. In the best-case scenario, a taxing authority may agree to forgive all prior period liabilities in exchange for a commitment to prospectively comply.
Merger and Acquisition sales tax work is typically performed for an hourly fee, a fixed fee or combination of both, depending on the specific scope of work and the degree to which the number of required hours can be reasonably estimated.