When you acquire or sell a business, you naturally want to perform your due diligence to identify and analyze any risk associated with the transaction. But have you factored State and Local Tax, or SALT, into the due diligence mix? If not, you may discover that another person’s tax compliance mistakes become your problem.
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SALT due diligence looks at the risks and exposures for a variety of taxes, including income/franchise, gross receipts, sales and use, withholding, and property taxes. The fact that each state has its own unique laws and rules that govern the direct and indirect taxes it imposes can make tax compliance especially complex and confusing for taxpayers.
Many buyers believe that any State and Local Tax issues the seller may have do not apply to them. Not so.
When purchasing a business, especially the assets of the business, many buyers believe that any state and local tax issues the seller may have do not apply to them. But this is not the case. Buying the assets of a company does not relieve the purchaser from SALT issues if the seller was not following or did not comply with state and local tax laws, regulations and rules.
Certain state and local taxes, including employee withholding and sales and use taxes, are considered trust fund taxes, meaning taxpayers must collect such taxes on behalf of the state and then remit them to the state. If taxpayers do not comply with their state’s laws and rules regarding these trust fund taxes, the state will impose personal liability on the owners of the company or successor liability on the purchaser of the company.
If you are planning to buy or sell your business, we strongly recommend that you carefully consider the risks or tax exposure associated with such a transaction. As a buyer, you should be sure to examine state and local tax issues as part of your due diligence process. As a seller, you should review your state and local tax footprint and determine whether you have any SALT exposures, so you can address them before the buyer begins their own due diligence process in purchasing your company.
If you have any questions, please contact either of the leaders of REDW’s State and Local Tax (SALT) practice, Principal George W. Rendziperis at george.rendziperis@redw.com or Principal James Ortiz at jortiz@redw.com.
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