virginia taxation
Merging or acquiring? Don’t forget state and local taxes.
P
otential state and local tax considerations are often given only cursory attention in a merger or acquisition. If the transaction is structured as the acquisition of stock (or ownership interest in the case of a non-corporate entity), the acquiring company is obtaining the target and all of its tax liabilities and exposures, except for those which may be mitigated or limited through the purchase agreement. Therefore, it is very important that the acquiring company identify — and, if possible, quantify — potential liabilities and exposures before finalizing the transaction.
Terry Barrett, CPA
Obtaining the information necessary to do this, though, is often hampered by the confidentiality of the proposed transaction and cooperation on the part of the target company. However, given the potential exposure, it’s imperative to analyze the target’s tax situation as thoroughly as possible. This article focuses on some of the state and local tax issues that may represent potential exposure or liability. In M&A, a wide range of taxes may come into play, such as income/franchise taxes, gross receipts, state/local business license fees, property taxes, sales and use tax and miscellaneous local taxes. Depending upon the nature of the business and the states or localities involved, there may also be other transactional taxes, such as utility, lodging/ meals or admissions, to name a few. Other non-tax — but often considered “tax-like” — issues are state
12
DISCLOSURES
•
MARCH/APRIL 2018
•
business registrations and unclaimed property. And, there may be others depending on the industry and states involved. To say that it is complicated is an understatement. One of the key issues to consider in any acquisition is whether the target company has been properly reporting and paying taxes where the company has nexus. Nexus is a connection with a taxing jurisdiction sufficient to create a tax registration and reporting requirement. Today, it is rare for a business to be operating only in one state. Consider Internet transactions, traveling sales people, traveling employees, the storage of inventory in another state, work performed for customers located in other states — all have the potential to create nexus. In addition, states have adopted a variety of nexus standards, with some traditional (physical presence) and others focusing on economic activity (sales). These all must be considered in light of a business’s operations/ activities and compliance efforts. From an income tax perspective, federal law (Public Law (PL) 86-272) provides protections from income tax filing requirements when the only activity of a business in the state is the solicitation of sales of tangible personal property. However, there is generally an income tax filing requirement when the in-state activities go beyond mere solicitation. Further, PL 86-272 does not extend to sales of services or
DISCLOSURES.VSCPA.COM
