Why State and Native Tax Due Diligence is Vital | Freeman Regulation

Why is State and Local Tax Due Diligence (SALT) important in Mergers and Acquisitions? Another's problems can be your headache and cost you a lot of money!

What is Due Diligence? Due diligence is the process of identifying and analyzing the risk associated with buying or selling a business. Tax risk, especially state and local taxes, is an integral part of this analysis.

There are many different types of taxes that companies should consider when conducting due diligence, such as: B. Property taxes. Sales and use taxes; Gross income taxes; Income tax; and franchise taxes. Each of these tax types have unique rules and effects, and state and local jurisdictions apply these taxes in different ways. Depending on where a company does business, it can quickly become complex.

One big misunderstanding I hear is, “I am buying the target company's assets. Why should I care if the target company is complying with state tax laws and regulations? I am buying the company's assets, not the company itself (or its equity). “Purchasing the assets does not relieve the buyer of problems that the seller may experience if that seller fails to comply with state and local tax laws and regulations.

Sales and use taxes, as well as withholding taxes for employees, are trust taxes where a taxpayer collects taxes on behalf of the state and remits those taxes to the state. Generally, states that impose sales and use taxes, or withholding taxes on employees, provide that a tax liability under those taxes may be recovered from the company, its owners, its officers, or a successor to the entity or property.

For example, if you acquire the assets of a company (the “Company”) and the company is audited for sales and use taxes, any government assessment not paid by the seller could result in a lien on the assets that were purchased from you. If the state places liens on such assets and you try to sell those assets, you must repay those liens before you can sell the assets. As mentioned above, the seller's problems became your troubles and headaches.

When considering buying a business, it is important to consider all of the risks that may be associated with a transaction. Some helpful state and local tax questions to ask are: Is the company filing wherever it needs to be? Are the submissions made correctly? Are there or have there been state audits? If so, what is the status? Does the company have any pending reimbursement claims?

If you are looking to sell your business, it is a good idea to start preparing and anticipating the due diligence activities that you should take in solving state and local tax problems early on. In preparing for the sale of the business, sellers should consider the following: take into account that the state tax reserves currently on the balance sheet are sufficient; Identify areas that may pose a hazard (e.g., non-filings and economic contexts) that are not currently reserved. Document your state and local tax audit history and the status of current audits. and ensure that you have taken the correct steps to comply with the changes resulting from recent changes in tax law (such as South Dakota v Wayfair and The Tax Cuts and Jobs Act).

As a buyer of any business, property or equity, or as a seller of any business, you need to be proactive in verifying that the seller is complying with state and local tax laws and regulations. As a buyer, the cost of performing due diligence can be less than the cost and headache of dealing with SALT issues. As a seller of a business, you need to be aware that a buyer will likely be performing due diligence when purchasing your business. Therefore, it would be to your advantage to do your own due diligence to identify any tax exposures prior to selling the company so that the process is much smoother when the buyer does their due diligence. As a seller, you don't want the deal to be abandoned due to a state and local tax problem.

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