Sales Tax M&A: Mitigation Options

Due to the pandemic, many businesses are in a precarious position relative to long-term survival. Some companies who previously were doing well are now in a situation in which a merger or acquisition could be their only way to survive.  No matter your situation, understanding how sales tax obligations could hinder your sale is important for any business involved or thinking about merging or being acquired. 

In a previous blog, we discussed 5 steps to avoid sales tax risk with M&A and the impact previous non-compliance could have on your merger or acquisition. But what if the risk and liability has already been exposed. What are your options?  

If prior period liabilities are identified prior to an acquisition, a business should evaluate tax mitigation strategies and options. Unfortunately, if the liabilities are identified during diligence, the options are often limited – consisting of either escrowing funds or entering voluntary disclosure agreements. 

Prior to diligence, you have multiple options when it comes to mitigation, including:  

• Refund tax to your customers - This option should only be considered when a business has concluded that sales tax nexus does not exist. Collecting sales and transactions tax and not remitting to the jurisdiction can be considered a criminal offense and could subject the officers of a corporation to criminal prosecution.  

• Prospective registration and compliance - Depending on the materiality of the tax exposure, prospective registration and compliance may be the most logical business decision. 

• Remit taxes collected or tax liability accrued on a current or prospective return - The business will remain at risk for penalties and interest under audit. 

• Voluntary Disclosure Agreements (VDA) – Almost all states have a formal VDA program allowing non-registered taxpayers to disclose a sales and use tax liability in exchange for penalty relief and a limited look-back. Most states do not look-back further than 7 years for an unregistered taxpayer. Most states’ VDA programs will prescribe either a 3 year or 4 year look-back period. Where a taxpayer has collected tax and failed to register to file and remit said tax, the limited look-back period doesn’t apply – all tax collected must be remitted. (Learn more about VDA’s in our video on the subject) 

Qualifications for participation in a state VDA program include: 

• Taxpayer is not registered for sales and use tax purposes* 

• Taxpayer is not under audit for sales and use tax purposes  

• Taxpayer has not been contacted by the jurisdiction for sales and use tax purposes

*Note: In some states, an agreement for disclosure can be accomplished for registered taxpayers 

• Amnesty – on occasion a state will offer an amnesty program. These programs are similar to a VDA except that there usually isn’t a look-back period. Another primary difference between amnesty and a VDA is that registered taxpayers can participate in amnesty. The purpose of amnesty is to generate revenue for the state while also accelerating collections of outstanding liabilities already assessed against taxpayers. Amnesty programs have a short life span – sometimes 3 months. 

• If the liability is identified during diligence, then the mitigation options are significantly limited.  The acquiring company will generally dictate the mitigation options which will often be a VDA in order to mitigate future penalties and interest.  In this situation, the acquired company will be responsible for the tax liability, interest and penalties (if not waived via the VDA) plus the fees associated with a tax professional executing the VDA. 

As you can see, it’s often best to identify and mitigate exposure prior to an acquisition.  Once the acquisition and diligence process begins, the business being acquired loses control over the mitigation options.  

Sales tax is confusing and if you go about things the wrong way, you could end up in an audit with a risk of penalties and interest due. During acquisition, the last thing you need is additional fees or penalties to pop up. By working with a sales expert, you can take the heavy lifting off your plate and eliminate risk and liability. Contact TaxConnex to learn more about how when you work with us, sales tax is all on us.