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What You Need To Know About State Tax Issues Before M&A Negotiations

Monika Miles - M&A

Is your company facing a merger or acquisition? Is state tax part of the negotiations? It needs to be! Whether you’re the company buying or selling, state tax issues often arise during the process – even more so now that so many states have enacted economic nexus laws. How should you plan ahead? It begins with due diligence!

Discovering State Tax Issues During Due Diligence

It’s not uncommon for state tax issues to be uncovered during the due diligence phase of an M&A deal as both companies look at ramifications of additional states coming into play.

Often, when a major buyer is looking into a target company, its CPA firm has already addressed it, whereas the seller company (which is usually smaller) generally hasn’t dealt with the ramifications of selling their products across state lines because they often have little or no representation. We work with many companies on the selling side of M&A deals, and help dispute or reduce the estimates the acquiring company’s CPA firm provides.

Is State Tax Really That Complicated?

In a word? Yes! As more companies sell across state lines and establish a presence in other jurisdictions, or nexus, they become responsible for that state’s taxes. Less than a year after the Wayfair Supreme Court ruling last year, most states have enacted economic nexus laws as well, which makes it easier to trip into establishing nexus.

For companies looking at M&A deals, there is much more potential exposure due to online sales sold across state lines. This is why it’s so important to do thorough due diligence as early in the process as possible.

State Tax Issues Affecting Mergers & Acquisitions

As an example of how an M&A can be impacted by economic nexus, several years ago we had a client in a medical device field. They sold a very interesting product to small-to medium-sized doctor’s offices across the country; they were advised by an accounting professional that they only needed to worry about collecting sales tax in their home state of California and one other state where they had an employee residing. However, the company created nexus in many states by virtue of traveling salespeople entering those states and providing demonstrations, training, and ultimately installation of the product. It turned out they had significant outstanding (and understated) state tax liabilities of more than $1 million.

As they were being courted by a much larger company to engage in a merger and acquisition deal, the acquirer informed them that, while they would move forward with the transaction, they would require a significant hold-back of funds for unpaid state tax liability.

While we were able to assist the target company in significantly reducing the arbitrary holdback by performing a more detailed taxability review and communicating with their customers about self-assessed use tax, the process took time and energy that the company could ill afford. We ultimately reduced the holdback amount by more than half, but it’s still an example of where much of this pain could have been alleviated if the company had done its due diligence six months prior to putting itself on the market.

Next Steps: Uncovering State Tax For M&A Deals

Regardless of where you are in the M&A process, it’s incredibly important to make sure you’ve done your due diligence! Knowing your state tax exposure, as well as the company’s you’re negotiating with, will help you come to the best agreement possible.

Monika Miles

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

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