Recently a client asked us to comment on their proposed merger plans. Mergers are always happening, so I thought it would be worth your while for us to comment on this to our friends and clients at large.
The basic facts were that, for various reasons, our client planned to simplify their corporate structure. The old structure consisted of a number of limited partnerships, limited liability companies, corporations and even a US branch of a foreign corporation. They planned to get down to just a few legal entities in the US by contributing member interests in the LLCs and merging several corporations out of existence. The question for us to comment on revolved around what would be the sales/use tax impact of such a transaction.
Many states have specific provisions that treat whether assets transferred as a result of a merger are subject to additional sales tax at the time of the transaction. Keep in mind that tax has likely already been paid on these assets when they were originally purchased. Our intuitive reaction is that tax should not be due on these assets again. However, we all know that intuitiveness is not always a good predictor of taxability of a transaction right? In the case of a merger, though, it can be said that most states generally would not tax those assets again. BUT, caution should be exercised in this scenario. Some states leave the question unanswered while others specifically tax at least certain types of assets transferred in a merger.
For example, some states have specific rules on motor vehicles that tax is due on a transfer to another legal entity. Louisiana is one such state. Texas is another state that taxes motor vehicle transfers in most cases, except in the case where the transfer is due to a "statutory merger".
If a state does not have specific statutory or regulatory guidance on assets transferred in a merger, then they may have issued informal guidance through letter rulings. Or, it may be in your best interest to seek a letter ruling in the case where significant dollars are at stake.
Mergers are one way to transfer assets, but another angle to consider is to structure a transaction as an "occasional" or "bulk" sale in order to avoid paying tax twice on the same asset. Many states have exemptions for bulk sales. Usually the seller cannot be a retailer (although some states allow retailers to have exempt bulk sales if they do not sell this type of item in the regular course of business). And usually, to be exempt, the seller must be selling all or substantially all of the assets.
Some states flat out do not exempt occasional sales -- Colorado, Oklahoma and Wyoming come to mind. The states that do exempt them all have their own particular rules, so this is an area that needs to be researched carefully according to the particular facts and circumstances. The taxes incurred or avoided in these scenarios is usually significant so it pays to be careful here. Sometimes this occasional exemption helps out in an audit if you are being assessed tax on a large equipment purchase, you should review the specific facts of the transaction and see if the purchase might have been exempt as an occasional sale. Maybe you bought the item from a company who was liquidating their assets. It may sound far fetched, but we have actually used this idea several times over the years to the substantial benefit of our clients. Maybe it will help you.
Wish you had a chart showing which states tax occasional or bulk sales? We can help. We have a handy chart that we can share on this with you. If you would like a copy for your own information, please let us know and we'll send it to you at no charge.