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As part of our M&A tax series, this article will explore the state and local tax consequences of business sales or mergers. A sale can take many different forms depending on the entity’s tax structure, but ultimately, business leadership is generally considering whether to sell its assets or whether the owners will sell their stock or equity interests in the company. This central question can lead to very different outcomes and implications, from both a legal and tax perspective.
One common way for a company to either merge or be sold is via taxable merger or sale of a stock/equity interest. Generally, when an entity is either merged or sold via stock/equity interest sale, sales and use tax liability will transfer to the purchaser. Thus, it is important for the purchaser to gain a good understanding of sales and use tax compliance and audit history for any company they are acquiring. With the recent advent of increased economic nexus for sales and use tax purposes in a post-Wayfair world, an understanding of sales and use tax compliance history and nexus risk is an even more important part of any buyer-side due diligence for stock/equity sales.
In addition to sales and use tax risk, a buyer will generally inherit the company’s other state and local tax obligations in a stock sale. Thus, a buyer should do a full review of a target company’s state income and franchise tax nexus and compliance history, property tax history, unclaimed property reporting, and any other state or local tax items that are present in jurisdictions where the target company is doing business.
Another common transaction type is a sale of business assets. In general, a sale of tangible personal property, such as the assets of a business, would be subject to sales tax in the state where those assets are sold. In order to mitigate this effect, however, most states have an occasional sales exemption that will prohibit sales tax from applying to asset sales in connection with a sale of a business. Importantly, though, certain states may not have such an exemption, or the exemption may be limited. In addition, states may also specifically exempt sales of substantially all of the assets of a business from sales tax. In most cases, though, if vehicles or certain other titled assets are involved, thought must be given to requirements of re-titling those assets that can lead to sales or transfer taxes in the context of an asset sale for those particular assets.
The purchaser should also be aware of successor liability and/or bulk sale provisions in various states. These generally require obtaining tax clearances, or withholding certain amounts to cover potential liabilities of the historic target.
A knowledgeable tax advisor can help you explore the state tax implications and nexus considerations of a particular merger, acquisition, or sale. P&N professionals have years of experience and a multidisciplinary team to assist from both the buyer-side and seller-side of a transaction. If you have questions on this topic, reach out to your P&N tax advisor or contact us.