Let's say your company wants to acquire another company. What are the sales tax issues? We recently performed some due diligence for a client of ours who was negotiating to buy a competitor. In this particular case, the acquisition was an asset purchase. Only certain assets were purchased, not all or substantially all of the assets just certain assets. The issues to consider will vary of course depending on the nature of the transaction and the facts present in the situation, but this case will at least be instructive as far as the given facts.
Here are some of the issues they considered.
1. First, does the purchase of the assets transaction itself incur any sales/use tax cost? You should review the applicable state and local tax laws in those states in which the Seller's assets are located to determine if the purchase of assets by the acquiring company would result in any taxes due on the actual purchase transaction. Obviously, you need to know where the assets are located in order to make this determination.
1a. Along those same lines -- you may want to include in the negotiation which party will bear any sales/use tax due on the asset sale is to be borne by the seller.
1b. How will the purchase price be allocated to the assets being purchased?
2. Is the sale reportable in the various states? Every state has their own rules, of course on whether a sale/purchase of assets is reportable in their jurisdiction. This is a matter that should be researched. In this scenario, a large portion of the assets were located in Washington, DC.
2a. Is the sale of assets taxable in DC?
It appears to be taxable but is not entirely clear. We read the law on casual sales and found to be somewhat contradictory. See what you think:
"Casual and isolated sales" means unplanned and nonrecurring sales made by an individual or organization to dispose of certain items of tangible personal property originally acquired for the person's or organization's own use or consumption. ( Reg. Sec. 402.1)
This is exactly what was occurring in our situation, so it would seem that there would be no tax due. But there is another provision that raises a concern. The law exempts certain types of transactions including "casual and isolated sales". Here is the law:
47-2005(7)(A) Casual and isolated sales by a vendor who is not regularly engaged in the business of making sales at retail;1
The Distributor in our case was regularly engaged in making sales at retail, but not sales of its business assets purchased and consumed for its own use. The assets being sold were all acquired over many years and tax was paid to DC when the assets were purchased originally.
We advised our client that a written letter ruling from the Mayor's office was desirable in this situation.
3. What About Successor Liability2?
Does the Seller have sales/use tax liabilities as a result of their business practices that could transfer to the buyer as the acquiring company.
You should review the laws in the states where the acquired company is registered to ascertain whether a company purchasing all or substantially all the assets of another entity would be held responsible for the prior owner's tax liabilities (referred to as "successor liability.") Obviously you want to avoid assuming any prior sales or use tax liabilities that could be owed by the Seller.
To be conservative, you can assume successor liability is an issue in most states even though it may not be specifically addressed in the statutes and regulations. Since successor liability is a concern, an acquiring company should always review the Seller's sales and purchases to estimate the amount of sales/use tax liabilities that may become your responsibility as a result of purchasing a new company.
> Copies of sales/use tax returns for the last 3 years.
> A list of states the company is registered in, along with the dates of registration for sales/use tax purposes.
>Report of sales where no tax was charged by Customer and by State.
>Actual sale or exemption certificates that were obtained by the Seller from its customers.
>Details of Seller's sales/use tax payable account(s) to see if taxes collected were in fact paid to the taxing jurisdictions.
>Any sales tax audits for the last 5 years.
Our motto is: The Best Surprise is No Surprise.
A thorough review of a company being purchased is the best way to minimize surprises.