Acquiring a company and sales tax
by January 15, 2024
Please note: This blog was originally published in 2021. It’s since been updated for accuracy and comprehensiveness.
There is a lot to consider when acquiring an e-commerce company, but one factor that may not ping your radar right away is sales tax liability.
Peisner Johnson CEO Jason Parr calls sales tax the “margin killer” when it comes to acquiring an e-commerce company. Why? We spoke with both him and Lauren Stinson of Cherry Bekaert in order to determine why it’s so vital to get a handle on sales tax before hitting the “Buy Now” button on an entire e-commerce business.
Sales tax liability: The “margin killer” in an e-commerce acquisition
When you purchase a business, you also purchase that business’s sales tax liability. If the business is sales tax compliant, then you have nothing to worry about.
But if the business has let some vital sales tax compliance slip through the cracks, then, once you become the business’s owner, you are liable for any sales tax compliance that might have slipped through the cracks.
Why? According to Parr, “If you are acquiring a business, you are the successor of liabilities of that business, and if they are not compliant regarding sales and use tax, that liability can add up to 5, 6, or 7 figures pretty quick.”
He adds, “A business may have a tax collection responsibility going back years or decades. A sales tax uncollected and then required at a later date with penalty and interest, may have an effective rate greater than 10%. If your profit margins run at 10%, they can be wiped out for years.”
It’s no wonder that big scary surprises when it comes to sales tax liability have been known to tank otherwise promising e-commerce acquisitions. Says Parr, “We have even seen material exposure ruin the sale, and ruin the dreams of those who wished for a retirement exit after selling their business.”
How can you avoid a sales tax surprise when acquiring an e-commerce business?
How to assess sales tax liability during an acquisition
Stinson, Cherry Bekaert’s National Leader of Sales & Use Tax, offered up some advice for potential acquirers on how to perform sales tax due diligence before making an acquisition.
Perform a nexus analysis
Make sure the company is filing and collecting tax everywhere legally required. This has changed and updated significantly since the South Dakota v. Wayfair Supreme Court decision, so it’s more important than ever to make sure that your target company has kept up with new sales tax regulations. For more information on nexus studies, here’s a good resource.
Review product taxability
Ensure that tax is being correctly charged on the products the company sells. This will usually require a review of the company’s sales tax engine and how that engine maps products to sales tax.
Carefully check that tax is being properly collected in all states on items like food, clothing, drugs, or services which are often taxed very differently from state to state or even district to district.
Review exemption certificates
Does the business you are acquiring sell to resellers? Ensure that you have valid and up-to-date resale certificates on file. This protects an e-commerce business from liability in cases where you are not required to collect sales tax from a buyer.
Review historical tax returns and payments
Ensure that all sales tax returns have been filed on time and that all payments have been made. Check with each state’s department of revenue to determine if there are any balances on sales tax accounts.
According to Parr, this doesn’t always have to be bad news. If you have purchased an e-commerce business, you are also eligible for any sales tax refunds that may be due to the company.
Quantify sales tax exposure and take remediation action
Even if you find significant sales tax exposure, there may still be a way, before or after the sale, to mitigate the damage. These include:
- Voluntary Disclosure Agreements (VDAs) – A VDA allows a company to anonymously disclose their sales tax liability to a state in order to make a deal to mitigate some of that tax liability. If you discover significant sales tax exposure (including past due taxes, interest and penalties), you can often use a voluntary disclosure to make a deal with the state and pay less in penalties than you would if caught up in an audit.
- Registering in new states – If your nexus analysis finds that your target company should have been collecting sales tax in a state but has not, you will likely want to register for a sales tax license in that state.
- Filing historical returns – You may also be required to delve into the business’s historical financial records and file past due sales tax returns.
Does all this sound overwhelming? That’s why a State and Local Tax (SALT) expert should be part of your team when purchasing an e-commerce business.
I found significant sales tax exposure. Now what?
If your target company’s sales tax liability is large, there are steps you and your target company can take to ensure that you aren’t left holding the short end of the stick on your acquisition.
According to Stinson, it is common to request an escrow fund to “cover any pre-acquisition sales and use tax liabilities.”
She added that it’s also common to have a remediation plan in place should large sales tax discrepancies or potentially bank-breaking sales tax exposure be uncovered during due diligence.
Stinson left any potential e-commerce business buyers with a piece of advice, “Be ready to be sales tax complaint on day one after the acquisition.”
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