This recent blog from Katz Sapper & Miller reviews how the SCOTUS’s 2018 decision in South Dakota v. Wayfair – which permitted states to impose sales tax liability on out-of-state sellers – has changed M&A due diligence.
We’ve previously blogged about Wayfair’s potential implications for buyers, but this blog looks at the due diligence implications of Wayfair from the perspective of both buyers and sellers. This excerpt discusses some of the steps sellers can take in advance to prevent unpleasant sales tax surprises:
– Identify what you sell and where you sell it. You need to know the overall number of transactions and sales numbers on a state-by-state basis. You also need to track individual products and services. Depending on the jurisdiction, some products or services may be exempt from tax.
– Identify exemptions that may apply and make sure they are documented. If a customer qualifies for a resale or use-based exemption (e.g., manufacturing), obtain the proper state documentation from the customer. Before the economic nexus rules affirmed by the Supreme Court, sellers might have paid limited attention to documenting exemptions because they had no physical nexus in a state and had no sales or use tax collection responsibilities. These exemption records take on more significance with the expansion of what creates nexus in a state.
– Determine where you are in compliance, where you are out of compliance, and why. When a seller can demonstrate thoughtful analysis of an issue like this, it adds credibility to your position and helps you manage the impact of potential sales tax liabilities on the deal. Buyers may not be happy to hear that there are risks in this area, but they will be much more receptive when you raise the issue, as opposed to a buyer discovering a potential liability of which the seller was unaware.
The blog also admonishes sellers to appreciate that their success in avoiding being tagged for non-compliance in the past isn’t going to persuade a potential buyer to overlook the risks and potential costs of previous and ongoing noncompliance. Sellers need to recognize that many potential buyers may be looking for a relatively quick resale of the acquired business, and the need to clean up sales tax problems may either deter them from moving forward or result in a hefty cut in what they’re willing to pay.
– John Jenkins