You’re advising a client through an exit. The due diligence checklist comes out, and somewhere between insurance policies and employee agreements, there’s a line about sales tax. You ask your client: “Do you think you have your sales tax handled?” They say yes. You check the box and move on.
That answer, however well-intentioned, could be costing your client hundreds of thousands of dollars at the closing table, and putting your reputation on the line in the process.
At Miles Consulting Group, we’ve spent 24 years helping companies resolve sales tax exposure, and a growing share of that work involves M&A due diligence. The pattern we see is consistent: advisors, brokers, and CPAs know that sales tax is a factor in deal negotiations, but the questions they’re asking don’t go deep enough to uncover real exposure.
Key takeaways: sales tax risk in M&A due diligence
- Most sellers genuinely believe they’re in compliance, even when they have six- or seven-figure exposure across multiple states.
- A surface-level checklist question will not uncover the kinds of issues that derail deals, reduce purchase prices, or trigger escrow holdbacks.
- M&A advisors don’t need to become sales tax experts; they need better questions and a specialist partner to bring in early.
- Proactive identification of sales tax risk protects the deal, the client’s proceeds, and the advisor’s credibility.
Why “do you have your sales tax handled?” is the wrong question
The M&A advisors we work alongside tell us the same thing again and again. They raise sales tax with the seller, and the seller says they’ve got it covered. The advisor, not being a state tax specialist, takes that at face value. And why shouldn’t they?
Sellers often think that because their CPA firm has the income tax side of the equation figured out in multiple jurisdictions, they also cover sales tax. But we find that is often not the case. Most CPA firms specialize in income tax (and financial audits), but not necessarily sales tax.
The problem is that most sellers are basing that confidence on an incomplete picture. Economic nexus laws, adopted by every state with a sales tax following the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., means a company can owe sales tax in states where it has no physical presence at all. The threshold in most states is just $100,000 in revenue, and for any tech or SaaS company selling subscriptions nationwide, that threshold can be crossed in dozens of jurisdictions without anyone realizing it.
So when a seller says “we think we’re compliant,” that belief is often based on incomplete information. And when the buyer’s CPA firm or Big Four advisors run their own analysis during tax due diligence, the exposure they uncover can reshape the entire deal.
How hidden sales tax exposure surfaces during M&A due diligence
We recently worked on a cross-border acquisition where a Europe-based technology group was acquiring a U.S. software company. The target sold electronically delivered software and cloud subscriptions nationwide but had never fully analyzed its nexus footprint. In anticipation of the sale, executives at the target company had rushed to register in several states without establishing consistent filing or collection processes. This compounded the risk rather than resolving it.
The deal faced multi-state historical exposure, unclear liability allocation between buyer and seller, and a substantial escrow holdback imposed at closing. Miles Consulting Group was engaged just days before the deal closed to clarify risk, allocate responsibility, and design a remediation plan. Through targeted negotiations and structured voluntary disclosure agreements, the escrow holdback was unlocked and approximately $100,000 was preserved for the sellers.
That outcome was positive, but it came at the last possible moment. Had an advisor on the seller side flagged this issue six to 12 months earlier, much of the disruption could have been avoided entirely.
In another engagement, a family-owned manufacturer preparing for sale faced a buyer’s tax due diligence estimate of more than $2 million in exposure across over 20 states. The company’s M&A consultant referred them to us. We conducted a comprehensive nexus study and taxability review, entered into voluntary disclosure agreements across multiple jurisdictions, negotiated penalty abatements, and reduced the initial exposure estimate by approximately $1 million. The transaction closed successfully.
Five sales tax questions every M&A advisor should ask during due diligence
You don’t need to become a sales tax specialist. But you do need to go beyond “is your sales tax handled?” Here are five questions that can surface real risk before it becomes a deal-breaker:
- Have you conducted a formal nexus study in the past 12 to 18 months? If the answer is no, or if the study was done internally rather than by an independent specialist, there are likely gaps.
- Do you sell digital products, subscriptions, or software across state lines? If yes, economic nexus almost certainly creates obligations in multiple states. The taxability of these products varies from state to state, making this a particularly complex area.
- Who determined where you have collection obligations, and when? A general accountant’s guidance from three years ago may not reflect current law. State rules change frequently, and obligations that didn’t exist in 2020 may well exist today.
- Have you reviewed your exemption certificates and sales tax documentation recently? Incomplete or outdated documentation is one of the most common sources of exposure during tax due diligence.
- If a buyer’s CPA firm ran an exposure analysis today, what would they find? This is the question that matters most. If your client can’t answer it with confidence, that’s the signal to bring in a specialist.
Why early specialist engagement protects both the deal and the advisor
Ideally, sales tax planning happens well before M&A is ever on the agenda. But once a transaction is in view, the best time to engage a sales tax consultant is 6 to 12 months before the seller goes to market. At that stage, there’s time to conduct a thorough nexus study, quantify exposure accurately, pursue voluntary disclosure agreements where appropriate, and establish a defensible sales tax compliance posture before the buyer ever asks.
The second-best time is during active due diligence. It’s less ideal, but structured remediation is still possible, as the examples above demonstrate.
The worst time is after the buyer’s team has already quantified the exposure and used it to negotiate the price down. At that point, the seller is defending rather than controlling the conversation.
The advisor who catches this early is the one the client trusts with the next deal. Referring a specialist to address sales tax risk costs nothing and protects everything. We work alongside CPAs, brokers, wealth managers, and M&A consultants regularly, and we’re always happy to discuss how a professional partnering relationship can work.
Ready to partner on your next deal?
If you advise clients through M&A transactions and want to ensure sales tax doesn’t become the issue that reduces the purchase price or delays the close, we’d welcome a conversation. Contact Miles Consulting Group at info@milesconsultinggroup.com or book a consultation through our website.
Frequently asked questions
Why is sales tax exposure often missed during M&A due diligence?
Sellers frequently believe they’re compliant because they file in their home state. But economic nexus laws mean they may have collection obligations in dozens of states based on revenue alone, without any physical presence. Unless someone with state tax expertise reviews their full multi-state footprint, these gaps go undetected until the buyer’s team finds them.
How can unresolved sales tax issues affect a business valuation?
Buyers typically estimate potential liability and factor it into the deal. Common outcomes include a reduced purchase price, an escrow holdback to cover potential exposure, indemnification demands, or in some cases, a collapsed deal. Because sales tax is a gross tax, it cannot be offset by net operating losses the way income tax can, which makes the exposure particularly impactful.
What is a voluntary disclosure agreement and how does it help in M&A?
A voluntary disclosure agreement, or VDA, is a program offered by most states that allows businesses to come forward and resolve past-due sales tax obligations. VDAs typically shorten the lookback period to three or four years, waive penalties, and provide a structured path to compliance. In an M&A context, they’re one of the most effective tools for reducing historical exposure before or during a transaction.
Should M&A advisors handle sales tax due diligence themselves?
Most M&A advisors, CPAs, and brokers are not specialists in multi-state sales tax. The most effective approach is to identify the risk early, ask the right questions, and partner with a firm that focuses exclusively on state tax remediation. This protects the client without requiring the advisor to develop expertise outside their core practice.
How far in advance of a sale should a company address sales tax exposure?
Ideally, six to 12 months before going to market. This allows time for a nexus study, exposure quantification, voluntary disclosure filings, and corrective measures. That said, remediation is possible at any stage; we’ve engaged on transactions just weeks before closing and still achieved meaningful outcomes for our clients.
