Monika Miles

Tariffs and Sales Tax: Are They Taxable?

In my 20+ years of sales tax consulting, it’s not often that a completely new question comes across my desk. But last week, someone asked something that made me pause:

“Are tariffs subject to sales tax?”

It might seem straightforward at first glance, but the answer, as with so many things in sales tax, is nuanced, state-dependent, and evolving.

With global trade playing a bigger role in supply chains and import duties making daily headlines, I suspect this question will only become more common. So this month, I’m taking a slightly different approach and dedicating the entire edition of Making Sales Tax Easy to unpacking this one topic.

Let’s explore how five key states, California, New York, Washington, Texas, and Illinois handle tariffs in the context of sales tax.

While each state has its own set of rules and interpretations, they all point in a similar direction: in most cases, tariffs that are passed on to the customer as part of the sale price are subject to sales tax.

But, of course, the details matter. And because this is such a pressing and current topic, new state guidance is being released regularly. We’ll continue to keep you up to date as things evolve.

Here’s an overview of what we’ll cover:

1. California Sales Tax Tariffs: The Role of the Consignee

• When tariffs are included in the taxable sale price

• Consignee vs. buyer: Who is the importer of record?
• How brokers and agents affect sales tax compliance

2. New York Sales Tax Tariffs: Broad Definitions, Broad Exposure

• No specific rule, but an inclusive “sales price” definition
• The risk of bundling tariff costs into the sales invoice

3. Washington: Explicit Guidance on Taxable Surcharges

• Tariff-related surcharges as taxable surcharges

• Full invoice value, including tariff lines, is taxable
• Applies to goods and services alike

4. Texas: Total Revenue Definition Includes Tariffs

• Texas’s inclusive take on what constitutes taxable revenue

• Separately stated fees often still taxable
• The seller’s burden to prove exemption

5. Illinois: Clear Direction That Tariffs Are Not Deductible

• Tariffs passed on by the importer of record are taxable
• Inclusion applies even when itemized separately
• What happens when the buyer pays the tariff?

6. What This Means for Your Business: Practical Takeaways

• Evaluating how tariffs appear on customer invoices
• Preparing for audits in states with differing sales tax laws

• Aligning sales tax strategies with evolving international procurement practices

Would you like more information? Reach out to us at info@milesconsultinggroup.com.

1. California: The Consignee Is Key

California is one of the few states that provides clear guidance on this matter. According to the California Department of Tax and Fee Administration (CDTFA), tariffs are subject to sales tax in California when they are passed on to the customer. If an importer incurs a tariff and includes it in the sale price, that amount must be included in the taxable base.

But California goes a step further and provides clarity around who pays the tariff. The identity of the importer of record, also known as the consignee, determines whether the tariff should be taxed.

If the seller is the importer of record and passes the cost of the tariff on to the buyer, then that charge is part of the taxable sale. However, if the buyer is the importer, and thus pays the tariff directly, then the tariff is not included in the seller’s taxable sales amount.

California also considers scenarios where a broker is involved. If the broker is the consignee and is acting on behalf of the seller, the tariff is taxable. But if the broker is the customer’s agent, then it is not.

This distinction is subtle, but significant. Businesses operating in California must be crystal clear on how their import transactions are structured and who is legally responsible for each part of the supply chain.

See more: CDTFA Ruling

2. New York: Broad Definition of Sales Price Implies Taxability

New York does not provide tariff-specific guidance, but instead relies on well-established principles of sales tax law. The state’s definition of “sales price” includes all receipts received by the seller, without any deduction for expenses or charges including shipping, delivery, or other fees. This includes, arguably, tariffs that are incorporated into the total price charged to the purchaser.

New York’s laws emphasize that even transportation and distribution charges, whether provided by the seller or a third party, are included in the taxable base unless they are separately stated and meet exemption criteria. So while tariffs aren’t specifically called out, their nature as a non-deductible seller cost, when passed through to the buyer, means they likely fall within the taxable “sales price” umbrella.

This matters for businesses importing goods into New York and passing along costs to customers. Even without a direct reference to tariffs, businesses must understand that bundling these charges into the sales invoice could result in increased sales tax exposure.

3. Washington: Explicit Guidance Confirms Taxability

Washington has now issued direct guidance stating that surcharges added to invoices to cover expenses like tariffs, fuel, or credit card processing fees are generally subject to tax.

Washington Department of Revenue has made it clear that these charges are not deductible from the selling price, even if they appear as a separate line item. The entire amount billed, including the tariff, is subject to both retail sales tax and B&O tax, and must be reported accordingly.

For example, if a business imports sweaters and adds a $5 tariff surcharge to a $60 sale, the entire $65 is taxable. Similarly, surcharges related to services, such as legal or moving services, are also fully taxable when included in the invoice.

This updated guidance leaves no ambiguity for Washington sellers. If you’re invoicing customers for imported goods and adding tariff-related surcharges, those charges must be included in your sales tax calculation.

4. Texas: Revenue-Focused Definitions Lead to Inclusion

Texas takes a slightly different route. While not directly commenting on tariffs, Texas tax law hinges on the concept of “total Texas revenue” for determining sales tax obligations. That definition includes all receipts related to the sale of tangible personal property and related services, such as handling, transportation, and installation.

Even if these fees are separately stated on an invoice, they are considered part of the taxable base unless a specific exemption applies. Tariffs, if passed through to the customer as part of the sale price, fall squarely within the kinds of costs that are likely to be included in Texas’s expansive definition of taxable revenue.

Additionally, Texas presumes that any sale of tangible personal property delivered in the state is taxable unless proven otherwise. The burden is on the seller to demonstrate a valid exemption, something that becomes even more important when importing goods that may be subject to additional charges like tariffs.

5. Illinois: Tariffs Are Not Deductible

Illinois has recently issued a General Information Letter (GIL) that confirms tariffs are not deductible when calculating sales tax.

Specifically, when a seller is the importer of record and passes the cost of the tariff along to the customer, whether itemized separately or included in the total price, the tariff becomes part of the gross receipts and is subject to Illinois’s Retailers’ Occupation Tax.

Illinois law does not allow deductions for costs of doing business, including importation taxes. Therefore, the full amount charged to the customer, including any separately stated tariffs, must be included in the sales tax calculation.

If the customer is the importer of record and pays the tariff directly, however, the seller is not required to include the tariff in the taxable amount.

This clarification reinforces the need for businesses importing goods into Illinois to carefully assess their invoicing practices and ensure that tariffs are properly treated for tax purposes.

6. What This Means for You and Your Business

Across the board, we see a commonality: when tariffs are included in the sales price and passed on to the buyer, they are typically subject to sales tax. However, the specific taxability can hinge on a variety of factors - who the importer is, whether charges are separately stated, and how each state interprets its sales tax laws.

For your business, this isn’t just a compliance box to check. It impacts how you invoice customers, how you handle international procurement, and how you prepare for potential audits.

If tariff charges are making their way onto your customer invoices, it’s critical to evaluate whether you’re applying sales tax correctly, especially if you’re dealing with multi-state filings or complex supply chains.

This is where having the right sales tax advisor makes a real difference. If you’re unsure how your business should be handling tariff-related charges, or want a fresh look at your taxability strategy, I’d be happy to help.

Need guidance tailored to your business?
Let’s talk. You can reach us at info@milesconsultinggroup.com or visit www.milesconsultinggroup.com to learn more.

by Monika Miles

Understanding U.S. Sales Tax: What Foreign Sellers Need to Know

Understanding U.S. Sales Tax: A Guide for Foreign Sellers

For foreign businesses entering the U.S. market, the process of navigating sales tax can boggle the mind. Unlike many countries with a single national tax system, the United States operates a decentralized sales tax structure, where each of its 50 states establishes its own tax rules, rates, and exemptions. This means that foreign sellers must adjust to a variety of different requirements depending on where they do business. So here it is – the basics of U.S. sales tax to help foreign sellers adapt, and then a deeper dive into the various exemptions that can bring tax relief.

Here's what you can discover:

1. The Basics of U.S. Sales Tax

• U.S. Sales Tax Overview

2. Common Sales Tax Exemptions

• Resale Exemption
  • How the Resale Exemption Works
  • The Role of Resale Certificates
• Non-Profit Organizations
  • Tax Exemptions for Non-Profit Entities
  • Eligibility and Requirements
• Government Entities
  • Sales Tax Exemption for Government Entities
  • Documentation Requirements
• Product-Specific Exemptions
  • Exemptions for Food, Clothing, Medical Devices, and More
  • State Variability in Product-Specific Exemptions
• Manufacturing Exemptions
  • Exemption for Machinery, Raw Materials, and Equipment in Manufacturing
  • State-Specific Rules for Manufacturing Exemptions

3. Obtaining and Maintaining Exemption Certificates

• Importance of Exemption Certificates
  • Role of Certificates in Sales Tax Compliance
• Process for Obtaining Certificates
  • Steps to Secure Exemption Certificates
  • Variations by State
• Best Practices for Certificate Management
  • Keeping Accurate Records
  • Ensuring Timely Renewals and Proper Documentation

4. Comparing U.S. Sales Tax to VAT

• Key Differences Between U.S. Sales Tax and VAT
  • Scope and Application
  • Documentation Requirements
  • State Variations vs. Nationwide VAT Rules

Not quite what you need? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. The Basics of U.S. Sales Tax

As mentioned, sales tax in the United States operates under a decentralized system, where state and local governments administer and collect the tax, unlike the uniform Value-Added Tax (VAT) systems found in many other countries. This means there is no national sales tax; instead, the tax rates, rules, and enforcement mechanisms are determined at the state and local levels.

Key Features of the U.S. Sales Tax System

1. Jurisdictional Variability:
   Sales tax rates and taxable categories of goods and services can vary widely not only between states but also among local jurisdictions within the same state. Some states, like Oregon and Delaware, impose no sales tax, while others, such as Tennessee and Louisiana, have combined state and local rates that exceed 10%. This patchwork structure demands careful attention to the specific tax rules in each relevant jurisdiction.
2. Origin-Based vs. Destination-Based Taxation:
   Most states operate under a destination-based sales tax system, where the applicable rate is determined by the location of the buyer. However, a few states use origin-based taxation, taxing goods and services based on the seller’s location. This distinction is critical for determining the correct tax rate and compliance obligations, particularly for remote or online sales.
3. Taxable Goods and Services:
   Each state defines its own criteria for taxable goods and services. While tangible personal property (e.g., electronics, clothing) is typically subject to sales tax, the taxability of services, digital goods, and software varies significantly. For instance, states like Texas tax data processing services, while others, like Colorado, may exempt them. In fact, to further emphasize the point, we have a lot of clients in the SaaS space.  California does not tax SaaS. Washington, New York and Massachusetts are 3 of about 21 states which DO tax SaaS. Texas, mentioned above, classifies SaaS as taxable data processing services (and gives a 20% reduction in the taxable base), while Colorado doesn’t tax SaaS at the state level, but cities within Colorado, like Boulder and Denver DO tax SaaS. Need a roadmap? Check out this article about SaaS.
4. Local Government Impact:
   In addition to state sales taxes, many local governments impose additional taxes, which can create layered obligations. Sellers must not only account for the state-level tax but also ensure compliance with local rates, surcharges, and filing requirements.

Considerations for Foreign Sellers

For foreign businesses selling into the U.S., understanding the lack of uniformity in sales tax rules is crucial. Compliance challenges include:

• Economic Nexus Thresholds: Following the Supreme Court’s 2018 South Dakota v. Wayfair decision, states can require remote sellers to collect sales tax if they exceed certain thresholds for sales volume or transaction count. These thresholds vary by state, adding complexity to compliance.

For more on the Wayfair decision and how it affects your tax liability by state, read this article we wrote.

• Marketplace Facilitator Laws: Most states now require marketplaces like Amazon or eBay to collect and remit sales tax on behalf of third-party sellers. Foreign sellers must understand their responsibilities under these laws.

For more on what makes you a marketplace facilitator, read this article we wrote.

• Documentation Requirements: Properly managing exemption and resale certificates, invoices, and tax filings is critical to avoiding penalties or audit risks.

2. Common Sales Tax Exemptions

Exemptions play a crucial role in helping businesses reduce their tax obligations and stay compliant with U.S. sales tax law. While exemptions vary by state, here are some of the most common categories that foreign sellers should be aware of:

Resale Exemption

One of the most important exemptions is the resale exemption, which applies to businesses that buy goods with the intent to resell them. In these cases, the seller does not have to collect sales tax on the transaction. To claim this exemption, the buyer must provide a resale certificate, a document that proves the purchase is for resale rather than for personal use. The process for obtaining and maintaining these certificates varies by state, and failure to comply can result in penalties.

Non-Profit Organizations

Certain non-profit organizations, such as charities and religious institutions, are eligible for sales tax exemptions in most states. These organizations must apply for tax-exempt status with the IRS and, once approved, they can present this status to vendors to avoid paying sales tax on their purchases. Note, however, that the form of the exemption certificate may differ between states as well. While many states do offer an exemption for sales to non-profit entities, some, like our home state of California, do not. Or, they may offer exemptions only to certain kinds of non-profit entities.  And of course, individual states may have additional requirements for proving eligibility.

Government Entities

Sales to government entities—whether federal, state, or local—are often exempt from sales tax. Sales to the US government are always exempt (although it may be tricky to determine exactly who is “the US government,” as certain agencies don’t qualify for a blanket exemption. Sales to other state and local entities are also often exempt, but not always! For foreign sellers, this means that sales made directly to government agencies or through government contracts are often not subject to tax. However, the seller must request and verify proper documentation, such as tax exemption certificates or purchase orders, to ensure compliance.

Product-Specific Exemptions

Many states offer product-specific exemptions, which can vary significantly depending on the state. Common examples include exemptions for food, clothing, medical devices, and certain types of manufacturing equipment. While some states exempt groceries or prescription drugs, others may not, creating a need for businesses to understand the specific rules in each state.

Manufacturing Exemptions

A particularly important area of exemption for foreign businesses engaged in manufacturing is the exemption for machinery, raw materials, and equipment used in production. This exemption allows manufacturers to reduce costs on necessary materials and equipment, but again, the rules vary by state. For example, some states allow exemptions for manufacturing tools and machinery, while others only provide exemptions for the raw materials directly involved in the production process.

3. Obtaining and Maintaining Exemption Certificates

Exemption certificates are crucial documents that foreign sellers must manage carefully to ensure compliance. These certificates serve as proof that a buyer is eligible for a specific exemption, such as resale or non-profit status. Below are some steps foreign businesses should take when dealing with exemption certificates.

Importance of Exemption Certificates

Exemption certificates are the foundation of tax compliance for businesses seeking to take advantage of available exemptions. Without these certificates, businesses may find themselves liable for sales tax, even if the transaction should have been exempt.

Process for Obtaining Certificates

To obtain exemption certificates, businesses must follow a state-specific process, which often includes submitting a completed form to the state tax authority. Different states may have varying renewal requirements, or some states may accept certificates from other jurisdictions, adding another layer of complexity for foreign sellers.

We can help you in the process. Contact Miles Consulting now.

Best Practices for Certificate Management

Proper management of exemption certificates is key to minimizing the risk of audits and ensuring compliance. Businesses should maintain accurate, up-to-date records of all exemption certificates, ensuring that certificates are renewed on time and that proper documentation is collected for every transaction where an exemption is claimed.

4. Comparing U.S. Sales Tax to VAT

For foreign sellers accustomed to VAT systems, understanding the structural and operational differences between VAT and U.S. sales tax is critical for ensuring compliance in the U.S. market. VAT (Value-Added Tax) is a multi-stage consumption tax levied at each point of the supply chain, from production to final sale, based on the value added at each step. In contrast, U.S. sales tax is a single-stage tax applied only to the final retail transaction. This difference significantly influences pricing strategies, compliance workflows, and record-keeping practices.

VAT operates under a nationwide framework with uniform rules, simplifying compliance across countries that use this system. U.S. sales tax, however, is a decentralized system where tax rates, exemptions, and filing requirements vary by state and, in some cases, by local jurisdictions. This fragmented regulatory environment necessitates a more tailored approach for foreign businesses operating in multiple states, requiring precise management of varying tax obligations.

Key Differences Between VAT and U.S. Sales Tax

• Scope of Taxation:
  • VAT: Imposed at every stage of the supply chain, with businesses reclaiming VAT paid on inputs.
  • U.S. Sales Tax: Collected only at the final point of sale to the end consumer, with no input tax credit mechanism.
• Documentation Requirements:
  • VAT: Involves detailed invoicing for every transaction within the supply chain to track tax credits and liabilities.
  • U.S. Sales Tax: Focuses on managing exemption certificates, tracking taxable versus non-taxable sales, and adhering to state-specific reporting obligations.
• Regulatory Uniformity:
  • VAT: Governed by a consistent national framework, reducing administrative complexity.
  • U.S. Sales Tax: Managed at the state and local levels, resulting in diverse tax rates, exemption criteria, and compliance requirements.

Partnering with Experts: Miles Consulting Brings the Human Touch

If you’re suitably nervous now about your tax compliance as a foreign seller, we can help. Yes, navigating U.S. sales tax laws can be challenging, especially for foreign businesses unfamiliar with the complexities of state-specific regulations, but that’s where professional guidance makes all the difference. At Miles Consulting Group, we don’t just provide tax solutions. We collaborate with you to understand your unique needs and tailor strategies that fit your business – even if you’re all the way ‘across the pond.’ Helping foreign companies succeed in the U.S. market is what we do best. Let’s work together to simplify your sales tax processes and ensure compliance, so you can focus on growing your business here in the States. You’ll be in good company! We’ve worked with clients across the globe, including Canada, Mexico, countries in the EU and Asia, and Australia – just to name a few!

Whether you're new to the U.S. market or expanding your operations, our expertise can help you streamline your sales tax processes and avoid costly mistakes. Book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.

by Monika Miles

Essential State Tax Considerations for M&A Transactions

Navigating State Tax Implications in M&A Transactions

Mergers and acquisitions (M&A) are already intricate processes, and state tax issues can add another layer of complexity. With the expansion of tax obligations following the Wayfair Supreme Court decision and the rise of economic nexus laws, businesses of all types must navigate evolving requirements that extend beyond physical presence in a state.

Here’s the deal (pun intended): state tax compliance isn’t just a formality; it can significantly impact the success of an M&A transaction. From understanding nexus requirements to ensuring airtight tax documentation, every detail counts.

This article explores key state tax considerations businesses should address before, during, and after M&A transactions. We’ll cover due diligence, navigating nexus laws, and maintaining accurate documentation. With expert insights from industry leaders and the team at Miles Consulting Group, you’ll gain practical strategies to protect the value of your transaction and avoid costly surprises.

Whether you’re buying or selling, this playbook is designed to help you tackle tax complexity with confidence. Let’s get started.

This is what we’ll be covering:

1. The Importance of Due Diligence

• Role of due diligence in identifying tax liabilities
• Risks for buyers and sellers related to state tax compliance
• Benefits of addressing tax issues early in the M&A process

2. Key Tax Concerns in M&A

• Economic nexus and state sales tax obligations
• Ambiguities in the taxability of products and services
• Documentation issues: missing exemption certificates and filings
• Legacy liabilities: unresolved back taxes and tax audits

3. Economic Nexus and Its Implications

• The Wayfair decision and its impact on nexus
• Implications of economic nexus for multistate businesses
• State-specific challenges and variations in tax treatment

4. Navigating State Tax Exemptions

• Importance of exemptions in M&A deals
• Best practices for managing exemptions and avoiding liabilities

5. How Miles Consulting Group Can Help

• Nexus studies and taxability reviews
• Documentation cleanup and audit defense
• Preparing for M&A readiness with Miles Consulting Group

Not quite what you need? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. The Importance of Due Diligence

State tax issues often arise during M&A due diligence and tend to catch both buyers and sellers off guard. Buyers typically scrutinize the target company’s compliance with state tax laws, focusing on any liabilities that could complicate negotiations or inflate the final deal price. If tax obligations are not properly addressed, the buyer may be left inheriting unexpected liabilities, which could delay or even derail the transaction.

Sellers may unknowingly overlook obligations such as economic nexus or taxability of digital services. These oversights can lead to reduced valuations, delays in closing the deal, or even deal termination. Addressing state tax matters proactively during due diligence ensures that both parties are aware of potential risks, ultimately leading to a smoother and more successful transaction.  In our practice, we often help to support the seller in a transaction. Generally, the buyer’s side is already well represented by attorneys and accountants. But the seller is often caught off guard by potential sales tax exposure.  And the truth is, many sellers DO have exposure, but in our experience, the exposure is often much lower than the buyer’s side due diligence because the buyer side tends to be ultra-conservative about successor liability, which is understandable. But we are often able to reduce the exposure significantly for the seller.

2. Key Tax Concerns in M&A

Here are some of the most common state tax concerns that arise in M&A transactions:

1. Economic Nexus: Many businesses trigger nexus across multiple states due to their operations, creating obligations to collect and remit sales tax in various jurisdictions.
2. Taxability Ambiguities: Taxability rules for products and services vary by state, leading to confusion and risk, especially for companies offering cross-border services or goods.
3. Incomplete Documentation: Missing or outdated exemption certificates, filings, or other records can increase risks and delay deal closures.
4. Legacy Liabilities: Unresolved back taxes or state audits may transfer to the buyer, creating successor liability concerns.

3. Economic Nexus and Its Implications

The landmark South Dakota v. Wayfair decision by the U.S. Supreme Court in 2018 fundamentally reshaped the landscape of sales tax collection. The Court ruled that a state could impose sales tax obligations on businesses even if they lacked a physical presence in that state. This ruling expanded the concept of “economic nexus,” meaning businesses with sufficient economic activity in a state—such as meeting a minimum sales threshold—must collect and remit sales tax in that state.

This change creates additional due diligence challenges for M&A transactions. Buyers must assess whether the target company has met the nexus thresholds in states where they conduct business or sell products. If the target has been non-compliant with these obligations, the buyer could inherit tax liabilities, including penalties and interest.

The Digital Dilemma - State-Specific Nexus and Taxability Rules of Digital Goods

The interpretation of nexus and the taxability of digital products, services, and SaaS offerings varies by jurisdiction. Understanding these nuances is vital in determining potential liabilities – here are a few examples of how fragmented these rules can get per state:

• New York: New York does not treat digital products as taxable because New York does not consider a digital product as tangible personal property (e.g., digitized visual files such as art and book text) while others—such as cloud-based software—are taxable. Buyers should carefully assess the taxability of the target’s offerings and ensure compliance with New York’s sales tax laws.
• Texas: Texas imposes sales tax on services like data processing partially, exempting from tax twenty percent of the charge for data processing services. While digital products are taxable at the full sales tax rate in Texas. Buyers and sellers must evaluate whether the target’s services fall under taxable categories and are fully taxable, as non-compliance could result in retroactive tax obligations.
• California: California in general does not impose taxation on digital goods. There must be a transfer of tangible personal property for a product to be taxable. Digital products and cloud-based software is generally not considered tangible personal property in California. The state seemingly does not have an aggressive stance on enforcing sales tax in the e-commerce and digital product sector.

At Miles Consulting, we specialize in M&A due diligence – particularly where Saas is concerned. Don’t do it alone. Let us help you.

Case Study

We recently worked with a wonderful client who had to deal with a few of these nexus and due diligence issues. We solved her problem, and the sale of her business was a resounding success. Here’s what happened:

Mid-Sized Manufacturing Company Overcomes Sales Tax Challenges During Due Diligence

When our client, the owner of a family-owned manufacturing company, found herself in the middle of the due diligence process to sell her business, a significant obstacle emerged: her company had unknowingly created sales tax obligations in many states due to its nationwide shipments. This revelation posed a serious risk to the sale, as the potential buyers flagged the issue during their review. Without immediate action, the deal could collapse or result in substantial financial liabilities.

“I found out that I wasn’t aware of or compliant with the State Sales Tax laws while trying to sell my company. After consulting with Monika and her team, I understood that I had reached nexus in 27 states. I knew this was not something I was prepared to navigate alone and needed to get in compliance, preparing and filing VDAs and back returns so that I could move forward in selling my company,” remarked our client.

How Miles Consulting Group Helped:

Understanding the urgency and complexity of the situation, Miles Consulting Group implemented a strategic plan to address the company's multi-state sales tax exposure. Key actions included:

• Preparing and filing Voluntary Disclosure Agreements (VDAs) and retroactive filings across all 27 states where nexus was identified.
• Managing the audit process and ensuring compliance with ongoing monthly returns and filings until the sale was finalized.
• Providing clear communication and structured support to make the overwhelming process manageable.

Results:

Thanks to Miles Consulting Group, our client successfully resolved the sales tax issues that had surfaced during due diligence, paving the way for the sale of her business. Accurate tax filings mitigated financial risks, and the buyer's concerns were addressed.

Find out more about our M&A Tax Due Diligence Services.

4. Navigating State Tax Exemptions

State tax exemptions, such as resale certificates, manufacturing exclusions, and tax credits, can significantly affect a company's tax obligations during M&A transactions. Proper management of these exemptions is crucial to avoiding unnecessary liabilities. The application of exemptions can vary greatly depending on the type of transaction (e.g., asset vs. stock sale) and the nature of the business. Mismanagement of exemptions can result in significant tax liabilities, especially if taxability is challenged post-closing.

Best Practices for Managing Exemptions

To minimize risks, businesses should adopt best practices for managing exemptions during M&A:

1. Organize Documentation:
   Ensure that all exemption certificates, sales tax filings, and other relevant documents are current, valid, and properly stored. Keeping these records easily accessible helps streamline audits and due diligence, reducing the risk of complications during the transaction process.
2. Understand State Rules:
   Exemption rules differ across states and may vary based on the type of transaction or business activities. It’s crucial to understand the specific exemption rules in each jurisdiction to ensure compliance and avoid missing opportunities to reduce tax liabilities.
3. Conduct Periodic Audits:
   Regularly audit exemption documentation to identify any discrepancies or outdated records before finalizing the transaction. Addressing potential issues early helps prevent complications and unexpected liabilities in post-closing audits.

By following these best practices, businesses can effectively navigate state tax exemptions, ensuring compliance and minimizing risks throughout the M&A process. Proper exemption management is essential to avoid financial pitfalls and ensure a smooth transaction.

5. How Miles Consulting Group Can Help

At Miles Consulting Group, we specialize in state sales tax remediation as a result of M&A transactions. We most often assist the seller in mitigating their exposure and maximizing the amount of money they get to keep related to state tax exposure. Our services include:

• Nexus Studies: Identify economic nexus obligations across states, helping companies assess where sales tax may be due.
• Taxability Reviews: Clarify how SaaS products are taxed in various jurisdictions, ensuring that your business complies with state-specific laws.
• Documentation Cleanup: Ensure that exemption certificates and sales tax filings are accurate and audit-ready, minimizing the risk of post-transaction disputes.
• Audit Defense: Protect your business during state audits, helping to resolve issues quickly and minimize penalties.
• M&A Readiness: Prepare for buyer scrutiny by proactively addressing tax liabilities and ensuring your business is in compliance with all relevant state tax laws.

State tax compliance is a critical component of successful M&A transactions. For all parties involved, addressing nexus, exemptions, and documentation early can safeguard valuations, streamline negotiations, and reduce risks. Whether you're buying or selling, understanding the nuances of state tax laws is essential for a smooth, compliant transaction.

Don’t know where to start? We do. Contact Miles Consulting Group today to ensure your M&A transaction is smooth, compliant, and successful. Book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.

by Monika Miles