If a sale of your company is on the horizon, the strongest position is the one with no surprises: multi-state obligations mapped years ago, returns filed, and documentation ready for review. Sales tax due diligence, done properly and done early, is what makes that possible. If a deal is 12 months out and you suspect your sales tax position is not fully in order, you are not alone and there is still time to act.
At Miles Consulting Group, we have spent more than 22 years working on multi-state sales tax matters, and M&A transactions are a regular part of our work. The six steps below are the sequence we work through with clients preparing for a transaction. The single most important variable in every step is time: the earlier you start, the more options you have.
Key takeaways: getting ahead of sales tax exposure before a deal
- Sales tax exposure surfaces in almost every M&A process involving a multi-state seller, and the side that quantifies it first shapes the negotiation.
- A nexus study and a taxability review are two different analyses, and finance leaders need both before a defensible number exists.
- Voluntary disclosure agreements can resolve historical liability before close, but they take time and are only available before a state makes contact.
- Deal structure, indemnification language, and escrow sizing all flow from the exposure number, so the analysis has to come first.
Step 1: Commission a nexus study
A nexus study is the foundation document of sales tax due diligence: a state-by-state analysis of where your activities create an obligation to collect and remit. Since the Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc., states may require remote sellers to collect sales tax based on economic activity in the state, even without physical presence. Every state with a sales tax now applies economic nexus rules, most commonly triggered by around $100,000 of in-state sales. A SaaS or tech company selling nationwide can cross that line in dozens of states without noticing.
Commission the study independently rather than doing it in-house; an independent analysis carries more weight in due diligence than a self-assessment. Cost and duration depend on how many states are involved and which ones, since some states are considerably more complex than others, so we evaluate each study individually. Done six to 12 months before going to market, a nexus study gives you time to act on what it finds. But when it’s done during due diligence, it documents a position you no longer have time to change.
Step 2: Map your product taxability across every state where you have nexus
Nexus tells you where you have obligations. Taxability tells you what you actually owe, and for SaaS and tech companies these are two separate analyses. You can have nexus in 30 states and owe tax in only 18 of them, depending on how each state classifies your product. Some states treat SaaS as taxable tangible personal property, others as a taxable service, and others exempt it entirely. Implementation, training, data services, and AI features may each be treated differently within the same state.
Overstating taxability inflates your apparent exposure, while understating it leaves liability for the buyer’s team to find. The output of this step is a taxability matrix: your products, mapped against the states from Step 1, with the open questions identified for further review.
Step 3: Quantify the exposure before the buyer does
With nexus and taxability mapped, you can calculate open liability by state: taxable sales, multiplied by the applicable rates, across the open lookback period, plus interest. Statutes of limitations typically run three to four years, but in many states the clock never starts if you never filed, so unregistered years can stay open indefinitely. That is why unaddressed sales tax exposure grows.
The exposure calculation factors directly into purchase price negotiation. A seller who presents a documented, specialist-reviewed figure sets the starting number; a seller without one responds to the buyer’s estimate, which is built to protect the buyer. Handled early, exposure stops being a liability the buyer can leverage and becomes something you control. You set the number, you choose the remediation path, and you walk into negotiation with the stronger position.
Step 4: Remediate before close with voluntary disclosure agreements
A voluntary disclosure agreement (VDA) is the primary tool for resolving historical exposure ahead of a closing. In a VDA, you approach the state before it approaches you, typically anonymously at first through a representative, in exchange for a limited lookback period and a waiver of penalties. Texas, for example, limits its review to four years, waives penalties and interest, and requires the tax data and payment within 60 days of the signed agreement. Terms vary state by state, which is why the state mix drives the timeline.
Case study: reaching compliance in 27 states before closing
We manage multi-state VDAs on our clients’ behalf, coordinating disclosures across every state where remediation makes sense, sequenced against the deal calendar.
One client, a family-owned manufacturer, was midway through due diligence when it emerged that the company had unknowingly built nexus in 27 states through nationwide shipments, and the finding threatened the sale. We prepared and filed VDAs and back returns across all 27 states and managed the resulting compliance through monthly sales tax filings until the transaction was finalized.
The sale closed successfully. The owner told us afterward that they could not have reached compliance on their own in the final weeks before the close. If you are considering a voluntary disclosure as part of your sale, contact us and we can discuss what it would involve for your states.
Step 5: Structure the deal to protect both sides
Even after remediation, some exposure usually remains, and deal structure determines who bears it. Asset purchases and stock purchases carry different successor liability profiles, a topic we cover in detail in our guide to what sales tax exposure costs at the closing table.
At the contract level, these three provisions matter most:
- Indemnification clauses that name sales tax specifically rather than relying on general tax language
- An escrow holdback sized from the Step 3 quantification rather than a round number
- Tax clearance certificates where available
Clearance certificate procedures and reliability vary from state to state, and in some states no meaningful certificate exists, which is another reason the underlying analysis matters more than the paperwork. If the paperwork for steps one to three are unavailable, expect that uncertainty to be priced into the escrow.
Step 6: Run the 90-day post-close integration checklist
The sales tax work does not end at closing. The combined entity has a new nexus footprint, a new product mix, and often two compliance processes running in parallel.
We recommend completing four tasks within the first 90 days post-close:
- Update or consolidate state registrations
- Merge the sales tax filing calendars so nothing lapses in the handoff
- Refresh exemption certificates under the surviving entity’s name
- Re-run the nexus analysis for the combined business, since thresholds each company stayed under separately may now be crossed
In our experience, audit risk is elevated in the first year or two after a deal closes; registration changes and final returns are visible events, and states pay attention to them. A clean integration reduces that risk. It is also the moment to put in place the ongoing process that, ideally, means the next transaction finds your sales tax position already in hand, years ahead of anyone asking.
Ready to start your sales tax due diligence?
Wherever you are in the process, whether a transaction is years away or already underway, the first step is the same: understand your actual footprint. Every engagement depends on how many states are involved and which ones, so we begin each one with a conversation about your specific situation. Contact Miles Consulting Group at info@milesconsultinggroup.com or book a consultation through our website to discuss your sales tax due diligence in preparation for M&A.
Frequently asked questions
What should a sales tax due diligence checklist include?
At minimum: a current independent nexus study, a state-by-state taxability analysis of every product and service, a quantified exposure calculation with statutes of limitations applied, the status of any voluntary disclosure agreements or registrations in progress, exemption certificate documentation, and the deal-structure protections (indemnification, escrow, and clearance certificates) that allocate whatever exposure remains.
How does sales tax differ in an asset sale vs a stock sale?
In a stock sale, the buyer generally inherits the entity’s historical liabilities, including unpaid sales tax. In an asset sale, liabilities are more separable, but most states have successor liability rules that can still attach sales tax obligations to the buyer of business assets. Structure reduces risk; it rarely eliminates it, which is why quantification and remediation come first.
How do you quantify sales tax exposure before a sale?
Start with the nexus study to establish where obligations exist, then apply each state’s taxability rules to your revenue in that state across the open lookback period, adding interest. Because unregistered periods can remain open indefinitely in many states, the analysis has to be done state by state rather than with a single national assumption.
How long does a voluntary disclosure agreement take before a closing?
It depends on the states involved, since each state runs its own program with its own review and payment terms; Texas, for instance, requires payment within 60 days of the executed agreement. Multi-state disclosures need to be sequenced against the deal calendar, which is why VDAs work best when started months before a planned close rather than during final negotiations.
What happens to sales tax compliance after an acquisition closes?
The combined entity’s obligations change immediately: registrations need updating, sales tax filing calendars need consolidating, exemption certificates need refreshing, and the nexus analysis needs re-running because combined revenue can cross thresholds neither company crossed alone. Treating this as a 90-day project keeps post-close audit risk as low as possible.
