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How does any business really know if they have a sales tax deficiency that they should be dealing with?  Public companies have a much easier time identifying their blemishes because of the added scrutiny of public reporting and independent auditing.  But smaller, private companies are less heavily scrutinized.  And that can be a good or bad thing in the same breath.

While public companies have the fiduciary obligation to identify and disclose their deficiencies, private companies can fly under the radar to some degree.  That's nice for public image, but failing to identify some of these potential liabilities can be damaging and even catastrophic later, during a merger, sale, or acquisition. Too many business owners have been gut-punched during the due diligence process, because an undisclosed (and unanticipated) sales and use tax deficiency has been identified by the acquiring party.  What happens next is generally ugly - an escrow is set up and the new owners put very little effort into minimizing the expense and liabilities which the escrow was set up to protect against.  The founder who created the business and created the real market value ends up getting the short end of the stick, by forfeiting the money in escrow.

This could all be avoided if founders knew their potential risk with sales and use tax, before somebody made them an offer to buy their company.  Attorneys who are practiced at managing these deals, tell me that one of the first places they snoop around to improve the deal for their acquiring clients is the sales tax history.  Those problems never go away, and some of the problems are accompanied by criminal liability for their owners.  Not even a marginally experienced attorney is going to ignore an issue that could create a perp walk for the new owner they represent.  Likewise, CPA firms often see unknown sales and use tax liabilities scuttle potential acquistions once they bubble to the surface.  Even those CPA firms have to hire expert help to identify and solve the sales and use tax problems, since only the very large CPA firms have sales tax expertise on their staffs.

The answer is really quite simple...really.  Treat sales tax with the same reverence and fear that you treat any other tax.  You would never attempt to sell your company without knowing your income tax, payroll tax, or property tax risk.  That's why those issues don't generally spoil the deal at the last moment.  So get some sales tax inspection and oversight before you get an offer and before some 3rd party ruins your big day.  And for goodness sake, don't let a sales tax auditor tell your suitor what the company is worth.  Gotta say "No Deal" to that one...

Doug Starr

Written by Doug Starr