Last time we looked at the damage that one company’s past sales tax exposure and liability can do to an M&A deal. In that part, we’ll examine what can be done about this exposure.
Mitigation
How can either or both parties in an M&A mitigate this exposure through further research or jurisdictions’ programs? (Bear in mind the buyer may be the one to determine mediation as part of due diligence or escrow.)
Lookback. Companies must register for sales tax companies in states where they have nexus and adhere to that state’s filing frequency requirements. If a
company has been timely filing but simply not charging, collecting and remitting the proper amount back to the jurisdiction, the statute of limitations typically runs back three to four years.
For a company that did not register in a jurisdiction and ignored sales tax collection and remittance, the lookback period could be seven to 10 years – or even unlimited.
Taxability of the customer base. Though this too varies state to state, not all sales to all customers incur sales tax. Items sold for resale are typically not taxed (manufacturing is one industry where this exemption is often found). Also untaxed, usually, are sales to nonprofits or to such entities as schools, churches, governments, charities and trade, social welfare and veterans’ organizations.
Customers’ tax exemption is no honor system: The customer must provide or have provided a tax exemption certificate that should be scrutinized during due diligence.
This is a written affidavit from customers that can be produced in an audit; they’re often state-specific unless the business has provided a multi-jurisdiction certificate covering the relevant states. The certificates must have the buyer’s registration/account number; buyer and seller names; the nature of the exemption (resale, manufacturing and so on); and the customer signature and the date.
Quantification of prior liabilities may require a buyer or seller contact last customers to validate customer is exempt and to obtain exemption certificates.
Mitigation options: Some are better than others depending on the company’s sales tax history.
Registering. A company that overall hasn’t charged, collected or remitted sales tax could simply register with a state and prospectively comply, recognizing that at any time the state could audit past performance. Bear in mind too that when registering with a state, some of the first questions will be when did a company first have a taxable sale in the state and when did that company first have an obligation to comply regarding sales tax?
As states are heavily reliant on voluntary compliance, there’s an incentive to voluntarily comply. This is a particularly good move for a company when the prior periods’ exposure is fairly immaterial and there’s no further opportunity to mitigate that exposure.
Voluntary disclosure agreement (VDA). These are available in some form in almost every state. They offer penalty abatement and a limited lookback of three or four years (particularly important if a company faces the lengthy or non-existent statute of limitations on non-compliance). A company discloses its past liability and pays the due taxes and interest but not the penalties.
There are drawbacks. A company that likes the idea of prospective registration, in most states registration disqualifies a company for a VDA.
And if a company has collected sales taxes and not remitted them, those taxes must be reported.
It’s wise for either the buyer or seller to establish a company’s system to stay ahead of sales tax obligations in the future. After determining nexus and taxability, see if the company needs a tax calculation option to integrate its with billing system, along with ways to maintain reporting and remittance (in-house or externally) and keep up with changes and the handling of the many notices from jurisdictions.
A seller having all this looks better to a prospective buyer than one that due diligence reveals hasn’t been tracking of sales tax exposure.
(Hear real-world examples on our M&A webinar, including scenarios regarding the new sourcing rules in Illinois, where exempt sales can still count toward economic nexus and VDAs and subsequent sales tax audits.)
If you think your business may be impacted by sales tax developments, contact TaxConnex. TaxConnex provides services to become your outsourced sales tax department. Get in touch to learn more.
Publisher: Source link