DealLawyers.com Blog

Earlier this year, the SCOTUS issued its decision in South Dakota v. Wayfair, which overruled prior decisions holding that an out-of-state seller with no physical presence in the state could not be required to collect sales taxes on goods it ships to in-state consumers.

The decision has dramatically changed the traditional sales tax regime for businesses, and this recent PwC blog says that buyers need to consider its implications when conducting tax due diligence on potential acquisition targets. Here’s an excerpt with some of the key takeaways for M&A transactions:

– Wayfair issues will involve more time during due diligence for collecting and analyzing information regarding a target’s profile. Potential buyers should consider this additional commitment in time, up front, in scoping their potential acquisitions.

– Potential buyers will likewise have to spend additional time identifying the risk and quantum of non-filing for sales/use tax and income tax in states that have current enactments, states that will apply their rules retroactively, and states that may apply existing non-economic rules broadly. Additionally, buyers will need to consider Wayfair in their financial models in order to accurately project their go-forward after-tax cash-flows.

– Should deals move to closing, buyers will need to determine how to deal with past non-filing exposure vis-à-vis taxing authorities (e.g., voluntary disclosure agreements), if at all.

The blog recommends that buyers obtain contractual protections (such as indemnification, escrow arrangements and purchase price adjustments) to help ensure that they do not assume historical Wayfair-related exposures. It points out that exposures for pre-closing periods that arise due to a post-closing change in a state’s interpretation of its tax law are likely to present the greatest challenge.

– John Jenkins