Thinking About an Acquisition? What Are Your State Exposures?
A Company may be in the process of either acquiring another company or are looking to be acquired themselves. In either case, the company wants to be aware of any potential state tax exposure areas, so they can move forward appropriately. Often however, the due diligence process is the first time the Company has addressed the multi-state landscape. Sometimes deals fall apart because a target company does not have its sales tax house in order. If a suitor company does its due diligence and finds significant exposure related to years of non-compliance with sales tax collection or income tax filing, it can either derail an entire deal, or significantly impact the purchase price.
What Are Some Questions to Be Asked if a Company is Being Acquired?
If a company is seeking to be acquired, we recommend examining the multi-state footprint and potential exposure prior to beginning the negotiation with potential suitors. In the process, companies will want to determine the states in which they may be liable for underreporting and then assess the potential liability. For example, should the company have been filing in a state for the last several years? What is the extent of the potential unreported liability? With an average sales tax of just, say, 8%, a growing company that has been incorrectly reporting can wrack up significant liability fairly quickly.
What if a Company is on the Acquiring Side?
If a company is on the acquiring side of the fence, we recommend exercising similar caution when reviewing the target company activities. Does the company engage in multistate activities? Where are they currently filing? How long have they been filing? Have they recently (within the last 2 years) conducted a nexus review or taxability study? Has it been well-documented in their files? If the answer to any of these is no, we recommend performing an extensive review to estimate possible exposure before the purchase.
M&A transactions often require the input of service providers across a wide spectrum—to include federal tax, state tax and sometimes international tax specialists. While a transaction may be structured a certain way for federal tax purposes, it’s important to note that not all states follow all of the federal M&A provisions. Most importantly, no matter which side of the deal a company is on—upfront due diligence is a must.
Want a due diligence analysis? Contact Monika Miles.
Author: Monika Miles founded Miles Consulting Group in 2002. The firm focuses on multi-state tax consulting—helping their clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.