Have You Proactively Addressed State and Local Tax Issues Before the For Sale Sign Goes Up? - Part 1
Most of the time, state and local tax is not at the forefront when a business owner or management team puts a company up for sale. However, our experience dictates that it should be addressed early in the process because of the potentially significant impact state and local tax can have on the seller’s side of the transaction. Unaddressed state tax issues can result in:
- Hix liabilities.
- More significant seller indemnifications against buyer state and local tax liability.
- Significant efforts on the part of the seller to obtain “clearance certificates.”
- Reduced selling price.
- Delayed closing dates while issues are addressed.
- Transactions that fall apart when buyers decide that the state and local tax risk is too significant to assume.
Another reason this should be discussed early in the process is two magical words: “successor liability.” The purchaser becomes responsible for the seller’s tax liabilities.
The legal structure of the transaction (asset purchase versus the sale of the company’s stock) will likely impact the level of “due diligence” your prospective buyer will require. Sales and use tax draws the biggest attention, but consideration will often be given to employment taxes, property tax, unclaimed property, and even state income tax, depending on how the transaction is structured. In addition, many states have specific requirements that must be met in the event of the buyer obtaining a clearance certificate (documentation from a particular state or local tax jurisdiction removing potential liability from the buyer for unpaid state and local tax liabilities of the seller). In a stock sale, all liability automatically transfers to the purchaser.
Whether you are planning on selling your company or just want to “tidy up the house” and get state and local tax issues under control, here are some tips on the issues potential buyers will raise when evaluating your business. In part one of this two-part series we will first address sales and use tax issues, since this typically draws the biggest attention when selling a company. The next edition of SALTED will address the remaining state and local tax types, including employment tax, property tax, unclaimed property, and state income tax, and the impact they have.
Sales Tax
When we talk about sales tax, it refers to the tax that is charged by the seller and collected from the buyer. When it comes to state and local sales tax issues, the following items are often addressed:
State Tax Registrations – Are you currently filing sales tax returns in the states where you have nexus and a requirement to charge and collect sales tax? Have you examined your nexus footprint lately? When no sales tax returns are filed in a particular taxing jurisdiction, the statute of limitations does not begin to toll. To the extent there are taxable sales, a state can go back as far it wants to request the filing of the necessary returns. Is there a bulk sale notice, or does the sales tax registration need to be surrendered in conjunction with the sale closing?
Product Taxability – Are you correctly charging sales tax on your sales of products, services, freight, and other charges for the states you are currently registered to collect and remit tax in? What support do you have for taxability decisions: letter rulings from the state, third-party memos or support, or internal state tax research?
State and Local Tax Rate – Is your system programmed correctly to charge the most up-to-date state and local tax rates? Local rates change on a frequent basis, and underreporting the tax amount for an extended period of time could quickly grow into a large exposure area.
Preparation of the Returns – How are the returns prepared, and is the seller properly taking into account all available deductions and exemptions?
Exemption Certificates – Do you have updated customer exemption certificates on file, and are the exemption certificates complete? State auditors are now focusing a lot of their time during audits and disallowing certificates that are not fully completed (e.g., missing a business registration number, exemption area not properly filled in or missing a signature). Please refer to the articles written by Daryl Ohland and Linda Feirn in this issue of SALT-ED that pertain to why it is so important to properly maintain certificates on file for both sellers and buyers.
Sales Tax Collected but Not Remitted – Do you reconcile your sales tax accrual on a monthly or quarterly basis to verify that all state and local sales taxes collected have been remitted to the proper taxing jurisdictions? Oftentimes a company may unknowingly have its system set up to collect sales tax, but the sales tax may not get remitted to the taxing jurisdiction.
Amended Tax Returns – Have any sales tax returns been amended within the last several years, and what is your understanding of the reasons the returns were amended?
Recently Audited – When was the last time you were audited for state sales tax purposes by a particular taxing jurisdiction? What were the results, and did you put procedures in place to correct any tax deficiencies discovered during the audit?
Use Tax
When we talk about use tax, it refers to situations when a vendor is not registered to collect sales tax on your billing invoice for a particular state and the burden falls on you, the purchaser, to selfassess and pay the proper tax to the state. When it comes to state and local use tax issues, the following items are often addressed:
Non-Capital Purchases – Do you have a system in place to capture and report use tax on a monthly or quarterly basis? Are your procedures and/or policies for how you account for use tax documented? Are you properly exempting purchases from sales and use tax that might qualify under a resale or manufacturing exemption?
Capital Purchases – Do you have a system in place to capture and report use tax on fixed asset acquisitions on a monthly or quarterly basis? Do you file copies of your fixed asset invoices in a separate location, or do they get filed along with general payable invoices? It might be best to keep and file fixed asset purchases in a separate location.
Refund Claims – Has the company submitted any refund claims to vendors or state taxing jurisdictions lately, and what were the outcomes?
Overpayment Review – Has the company engaged an outside provider to review prior-year payable invoices to determine whether taxes were over or underpaid? What were the results of the review, and were any recommended changes implemented?
Exemption Certificates – Do you retain a copy of exemption certificates issued to vendors?
Inventory – Do you remove any purchases from inventory for which you are deemed the consumer of the purchased items and owe use tax?
Recently Audited – When was the last time you were audited for state sales tax purposes by a particular taxing jurisdiction? What were the results, and did you put procedures in place to correct any tax deficiencies discovered during the audit?
Purchasing a Business
The same concepts and ideas that were discussed above for a company in the process of selling their business can also be used for someone who is purchasing a business. Addressing the proper tax state and local tax issues can be a complex issue when selling or purchasing a business. Even if you are not thinking about selling your company, the suggestions above can provide a quick touch point to determine whether you are in compliance with your state and local tax filings. Wipfli has the expert resources to help you deal with state and local tax issues when selling or buying a business. If you have questions about the procedures your business may or may not currently have in place from a state and local tax perspective, Wipfli LLP can help.
