Although it may not seem like sales tax has much to do with mergers and acquisitions, the truth is, many deals have fallen apart because of multistate sales tax issues. Controllers and CFOs who have seen the process first-hand know how messy the acquisition process can be – particularly if the target company’s multistate tax issues (especially sales taxes) haven’t been addressed.
How Does Sales Tax Affect Mergers & Acquisitions?
As a company looking to be acquired, it’s important you work with a firm that specializes in this area; this can help you identify and mitigate some of the potential problems before the deal closes. If you’re considering an acquisition in the next year or two, we highly suggest a nexus, taxability and potential exposure review prior to a bigger company calling and performing their own due diligence. This is definitely a case where knowledge is power!
Why Should the CFO or Controller Care?
Although CFOs and Controllers have a lot of financial experience, dealing with all the sales tax rules is likely to be outside their wheelhouse. There are so many things to consider in an M&A deal, and making sure both parties are following all merger and acquisition provisions can be difficult – especially considering that not all states follow the federal standards. The sales tax consequences are often forgotten until the very end – when it may be too late to proactively deal with them!
How Can Your Business Prepare?
The most important step you can take prior to being acquired is to do due diligence before the deal.
Unfortunately, sometimes an the opportunity for an acquisition is the first time a company has looked at the full picture; it’s not uncommon for businesses to have nexus in states and not realize it, which could create a significant liability for potential buyers. We always recommend you do your due diligence and be up front about the issues so you can come up with a resolution that prevents your potential suitor to offer a much lower purchase price, create a sizable holdback of funds, or to walk away from the deal completely.
For example, we had a client that leased small pieces of equipment to customers in multiple states. They didn’t realize this created nexus in many states and they’d been handling sales tax incorrectly for years. They wanted to be acquired and had a bigger company interested, but the larger business looked at the potential exposure and, because the target company couldn’t quantify the exposure, the deal ended up falling through. I believe that if the business being acquired had some sort of documentation detailing the potential exposure, the acquiring company probably would have gone through with the deal.
Another good reason to be prepared before a deal is that personnel changes often happen shortly after the acquisition. There are often new people trying to figure out the acquired company’s books and records, as well as a company’s historic multi-state activities. These people may not have a stake in whether a financial holdback related to sales tax is ultimately released. It’s a better idea to be pro-active and drive this analysis when your team is still in place and has the history to make educated decisions.
Next Steps for Companies Looking to be Acquired
- Look at your state sales tax picture before you begin looking for a potential buyer or investor.
- Complete a nexus study to determine in which states you may be liable for underreporting and then assess the potential liability.
- Ask these questions:
- Where are you doing business?
- Are you potentially creating nexus anywhere you hadn’t thought about?
- Do you have exposure in multiple states? If so, what’s the level of exposure?
- How big are the sales? What kind of liability are you creating? You’d be surprised how quickly you can get to a $1 million exposure with an 8% sales tax rate.
These are all questions we can help you answer and, if you do have exposure or liability in multiple states, we can assist in mitigating some of it prior to an acquisition.
Please contact us if you’d like to know more! In the meantime, don’t miss the next post in this series, which will offer advice and insight for businesses looking to acquire a smaller company.
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects. To learn more, contact us today at www.MilesConsultingGroup.com.
