SALT Obligations When Selling Businesses
Business owners should be aware of state and local tax (SALT) obligations as they plan the sale of their business. SALT considerations are often overlooked, and such omission can later delay, impair or nullify a deal. When state and local taxes are not included in the due diligence process, subsequent SALT liabilities become problematic and sometimes costly by giving the buyer leverage to negotiate a lower price. A brief overview of some of those SALT considerations are highlighted below.
Sales and Use Tax Concerns
SALT due diligence transactions have become much more complex in the past five years. In the 2018 U.S. Supreme Court case South Dakota v. Wayfair (Wayfair), the Court denied a challenge to South Dakota’s law requiring remote businesses selling into South Dakota to collect and remit sales tax if they exceed the state’s “economic nexus” threshold. In the wake of Wayfair, physical presence is no longer a requirement for sales tax nexus, causing companies to register, collect and file sales tax returns in many more states.
Income Tax Issues
States are increasingly applying Wayfair economic nexus principles beyond sales and use taxes. A seller’s advisor should conduct a review of the target company’s income tax records and procedures to identify tax risk. Reviews should include quantifying potential exposure and providing recommendations to address any issues.
Also expanding states’ ability to require income tax filings from out-of-state taxpayers is the Multistate Tax Commission’s (MTC) revised guidance addressing the applicability of Public Law 86-272. In its August 2021 guidance, the MTC outlined several activities that would not be considered protected under the 1959 regulation. Unprotected activities would include the likes of assisting after a sale through an electronic chat room or via email, or even placing internet cookies on customers’ computers. In fact, most businesses engaged in the online sale of tangible property can no longer rely on protection under P.L. 86-272. As the electronic economy evolves, more states are implementing laws to capture taxes on all kinds of digital activities, including assets recorded on a blockchain, such as cryptocurrencies.
Employment Tax Exposure
Independent contractor versus employee misclassification continues to challenge many taxpayers, including sellers of businesses. If a company selling its business has this issue and is not diligent in its compliance, there may be payroll tax and unemployment insurance exposure.
The Challenges of Remote Work
The ubiquity of remote and hybrid working models has also added a layer of complexity to state income taxes, franchise taxes, sales and use taxes, and payroll taxes, as well as credits and incentives. As companies heed employee demands for greater flexibility, they might not be aware of the expanded SALT exposure the remote or hybrid working models have created due to having presence in additional state and local tax jurisdictions. These tax risks often become apparent both pre- and post-close and should be addressed to avoid a potential dilution of value, delay of the deal closing or end of the deal.
State transfer taxes are another often-overlooked area that can negatively impact companies involved in sell-side transactions. A common misunderstanding is that state transfer taxes do not apply when the stock or equity of a business is sold as opposed to a company’s assets. Many states are changing real estate transfer laws to increase tax revenues. For example, individuals taking a stepped-up basis in the assets of a company will pay incremental taxes when the state treats the transaction as a sale of assets versus a sale of equity.
Tax Savings Opportunities
State tax due diligence should also ensure sellers are taking advantage of potential tax savings opportunities. The most common opportunities involve tax credits that have not been identified. These can include research credits, job credits and energy efficiency credits as well as ensuring a company is taking advantage of potential state pass-through entity (PTE) elections.
The SALT issues identified are many, but these are not all of the state and local issues to consider during due diligence. From economic nexus to the taxability of transactions to PTE tax elections, it is increasingly important to review SALT matters in the due diligence process. Sellers should commence their internal SALT due diligence to better understand the impact of potential SALT exposures on the value of the company they are offering for sale.
Bryan M. Holm
Bryan M. Holm, CPA, MST, is a manager with HBK CPAs & Consultants.
This article appeared in the Spring 2023 issue of New Jersey CPA magazine. Read the full issue.