You feel relief wash over as the ink dries and the lawyers finalize the purchase agreement. After months of scouting acquisition targets, studying diligence findings, and negotiating the best possible deal, you have officially closed on your brand-new company–, congratulations! While you must be tired from the hard work that has gone into the process so far, and your focus has already shifted to integration, A&M TAX cautions you to not forget about pre-acquisition indirect tax exposures that were identified. These skeletons are in a closet that you now own. If you wait too long to remove them or address the underlying policies and procedures that created them, you may end up feeling haunted by your new purchase. Additionally, there are some key factors that you may benefit from by addressing these issues early on. A&M TAX can help you prioritize the exposure, evaluate current and future risks, determine the best course for remediation given your needs and goals, and execute the remediation process.
A&M TAX has noticed that many transactional due diligence workstreams identify indirect tax exposures. Since laws vary by jurisdiction, and there are several indirect taxes that are generally levied by state and local jurisdictions (i.e., sales and use, excise, gross receipts, etc.), indirect tax rules can be complex to navigate and difficult to keep up with. With the Wayfair ruling in 2018 and remote work becoming more popular post-COVID, many companies are haunted by additional and unintentional tax filing obligations. Additionally, many jurisdictions are continuously issuing new rules that expand the tax base for companies operating in or selling into their jurisdiction, and often do so with convoluted and broad language that does not always align with industry-acknowledged definitions. Further, companies that would be making sales to otherwise exempt customers, often miss out on the benefits of these exemptions because of technicalities related to exemption certificate maintenance (i.e., certificates are not readily on file, certificates issued in your predecessor’s name, etc.). While this is not an exhaustive list of what issues we see in indirect tax diligence findings, they tend to be among the most common issues that have the most material impact on liabilities.
The policies and procedures that lead to the creation of the pre-acquisition liability will need to be reviewed and updated to prevent the prolongation of post-acquisition exposures. Sometimes these changes may be minor, but more often the solution requires detailed industry-specific analyses, anonymous settlement negotiations with taxing authorities, new compliance obligations, training team members and implementing processes to fulfill these obligations. To complicate matters further, successor liability rules determine when pre-acquisition liabilities are attributed to the successor and their broadness varies by state. Accordingly, regardless of any contractual protections that you may have negotiated in the contract, your risk will not disappear on its own. It can be tempting to consider remediation efforts low on your to-do list, but we urge you to reconsider the importance of resolving these liabilities quickly. Unfortunately, in practice, we often see remediation efforts delayed until a taxing authority has issued an assessment and the negotiated contractual protections have expired, or the issues are identified in a subsequent due diligence analysis. As a result, what started out as a minor liability has grown substantially and you are now on the hook for your predecessor’s mistakes.
The alternative and optimal choice, which allows successors to capitalize on several key benefits, is to address these indirect tax issues early after closing and within the periods outlined within the seller’s purchase agreement to capitalize on the ability to recover out-of-pocket costs. Many settlement programs can take nine to twelve months to reach their conclusion, but we often see indemnification or escrow terms that only survive twelve months post-closing. Accordingly, being proactive by initiating remediation efforts early may enable you to rely on funds negotiated with the seller to cover liabilities associated with these remediation efforts. Moreover, officers and directors of a company can be personally liable for certain tax issues of their company. Consequently, remediating liabilities for the company serves the dual benefit of providing relief to the officers of that company and ensuring compliance both historically and prospectively. A&M TAX says the benefits of addressing legacy liabilities early on are too lucrative to overlook, and the consequences of waiting are too substantial to overlook.
So, what should you do if you recently acquired a company and could use support cleaning up the prior owner’s liabilities? Once you have taken the first step of contacting A&M TAX, we will develop a comprehensive plan that will guide your path from due diligence exposures to relief and compliance. Tax due diligence, which is designed to quickly identify and quantify material issues, may experience data gaps when confidentiality impacts the seller’s availability to collect and provide necessary data, and fast paced turn arounds for competitive bids prevent diligence practitioners from waiting for perfect data sets. Accordingly, A&M TAX’s comprehensive plan starts by verifying the due diligence nexus findings to ensure you have an accurate depiction of where you need to focus your efforts. Next, A&M TAX will analyze and categorize your revenue streams to ensure that you are paying and/or collecting taxes appropriately both historically and prospectively. Once A&M TAX has determined what taxes you should focus on, we can refine and reduce the exposure by looking for and validating exemptions. After discerning the where, what and how much, A&M TAX will help you determine the best course for remediation in each applicable jurisdiction which includes anonymously negotiating settlements and providing support with registration and workpaper preparation. Additionally, A&M TAX can automate your sales tax function for ease of prospective compliance, help you update your policies and procedures and even review your purchases and historical sales tax filings to look for cash-back refund opportunities.
No matter how scary the skeletons in your new closet may be, you should deal with them before you find yourself haunted by your new purchase.