When entertaining discussions about mergers and acquisitions ( M&A ), due diligence practices as they pertain to the state tax side of a deal are a key item. We frequently consult with clients that are in the process of either acquiring another company or looking to be acquired. In either case, the client wants to be aware of any potential state tax exposure areas so they can move forward appropriately and correctly negotiate the deal.

Often however, the due diligence process is the first time the company has addressed the multi-state landscape. Sometimes M&A 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 Due Diligence Questions To Ask If A Company Is Being Acquired?

If a company wants to be acquired, we recommend examining the multi-state footprint and potential state tax exposure prior to beginning the negotiation with potential suitors. In the due diligence process, companies will want to determine the states in which they may be liable for underreporting and then assess the potential liability.

For example:

• What are the activities of employees or third-party contractors in states beyond the company’s “home state?”
• Has the company created nexus (either physical presence or economic nexus)?
• Should the company have been filing income taxes or other business taxes in a state for the last several years?
• If so, what is the extent of the potential unreported liability?
• Is the company obligated to collect and remit sales tax? When did this requirement start?
• How does the Wayfair ruling on economic nexus impact prior exposure?

With an average sales tax of almost 9 percent, a growing company that has been incorrectly treating its sales tax obligations can wrack up significant liability very quickly.

Have a question? Contact Monika Miles And Team, Miles Consulting Group.