When considering the tax implications of mergers and acquisitions (M&A), it’s essential to be aware of state tax issues that can significantly affect the transaction. Here is a list of the top 5 state tax considerations in M&A transactions:
1. Sales and Use Tax
Assess the transaction’s sales and use tax implications, including the handling of historical liabilities and the post-transaction obligations. Sales tax will follow the buyer in most circumstances, so a buyer needs to decide how to address any exposure via escrow, voluntary disclosures, reductions in purchase price, or other means. Post-sale, a buyer will also need to know if additional sales tax registrations are required depending on the structure of the acquisition.
2. State Income Tax
Evaluate the impact on state income taxes, including changes in tax attributes such as net operating losses and tax credit carryforwards. Determine if the historical filings were correct, if states were missing, and if there is a potential impact on a buyer, which could vary depending on the transaction structure. Understand how the merged entity will establish tax nexus in various states and how income will be apportioned for state tax purposes. This may also require updating state tax compliance processes, including registrations, filings, and reporting requirements, to reflect the new combined entity’s structure and operations.
3. Transfer Taxes
Determine if any state transfer taxes apply to the transaction and whether exemptions or credits can mitigate the cost. The transaction itself could trigger sales tax on the transfer of business assets, which should be evaluated. If any real property is being transferred, the relevant state rules should be researched.
4. Business Tax Credits and Incentives
Consider whether existing state tax credits or incentive agreements will survive the transaction and if new opportunities will be available post-transaction.
5. Unclaimed Property
Both buyers and sellers must ensure they comply with state unclaimed property laws, which can be complex and vary by jurisdiction. Failure to maintain proper records and report unclaimed property can lead to audits, penalties, and interest. Evaluating the risk associated with unclaimed property is critical for an acquirer because historical noncompliance by the target can lead to significant financial exposure. The risk becomes particularly acute if the target has never reported or has underreported its unclaimed property in the past.
Each state has different rules and regulations regarding M&A transactions, so it’s crucial to consult with tax professionals who are well-versed in the tax laws of the specific states involved. They can provide guidance tailored to the particularities of the transaction, helping to navigate these complex issues effectively.
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