When preparing for a merger or acquisition, buyers often focus solely on the company’s federal tax obligations and requirements during the due diligence process. Buyers often overlook important State and Local Tax (‘SALT’) ramifications prior to completing the transaction. However, it is important for buyers to carefully consider all tax obligations of the target business. Doing so ensures compliance with federal, state, and local tax laws. Otherwise, buyers may find themselves subject to penalties, interest, and other unwanted liabilities that may be passed on from the seller.
Stock acquisitions vs. Asset acquisitions
Stock acquisitions and asset acquisitions present a stark difference when it comes to a buyer’s obligations from a SALT standpoint.
In a stock acquisition, the buyer acquires the integrity of the stocks or shares and becomes the target company’s owner. As a result, they take over the company’s entire assets and liabilities. In contrast, in an asset acquisition, the buyer purchases specific assets from the target company, such as tangible property, inventory, equipment, etc. and agrees to take on the liabilities related to these assets. In stock acquisitions, the buyer steps into the shoes of the seller.
Stock acquisitions, on the other hand, allow for buyers to select which assets and liabilities they want to purchase of the target company.
Does the nature of the transaction impact the company’s SALT obligations?
Generally, in stock acquisitions, the buyer accepts full ownership of the target’s assets and liabilities. The buyer inherits all liabilities of the target company, including the state and local tax liabilities. When it comes to asset acquisition deals, on the other hand, the buyer can benefit from a sales tax exemption, if applicable, or from a sales tax clearance letter for bulk sales transactions. As discussed below, in bulk sales transactions, the buyer can be held liable for unpaid sales and use taxes if it does not receive the tax clearance letter from the state.
Successor Liability
If the buyer doesn’t notify the Tax Department, it creates ‘successor liability’ making the buyer accountable for owed sales tax.
Thus, it is important to consider undertaking a formal review of the company’s SALT affairs as part of the acquisition. This will enable the buyer to adjust the selling price for any unpaid tax liabilities discovered in this process. Some states expect the buyer to withhold an amount of the purchase price to cover any unpaid sales tax liability.
Buyers should incorporate a thorough state and local tax review as part of its due diligence process. Doing so will help avoid being held liable for unanticipated state and local tax liabilities.
