What you need to know about sales tax when selling your company
by February 17, 2024
Please note: This blog was originally published in 2021. It’s since been updated for accuracy and comprehensiveness.
When you get busy making your e-commerce business attractive to buyers, chances are “making sure my sales tax is in order” is pretty far down on the list.
But there’s a reason Jason Parr, CEO of sales tax firm Peisner Johnson calls sales tax “the margin killer” when it comes to selling your business. When a buyer purchases your business, they are also buying your sales tax liability. This means a savvy buyer will make sure all of their sales tax i’s are dotted and t’s are crossed before they sign on the dotted line.
You may be selling your business to move on to the next big thing, or because a sale is part of your ultimate retirement goal. Either way, if you’re worried that sales tax could derail your business sale, read on for tips on how to prepare.
Are you on the other side of this transaction? Read our Acquiring a Company and Sales Tax article.
How sales tax can affect a business sale
As mentioned above, when a buyer buys your business they buy all of your business, including sales tax liability you may not even be aware of.
According to Parr, “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.”
If your business is in sales tax trouble, the best case scenario is that your buyer gives you time to remediate it. This can stall the sale and cost you money in fines and penalties from states.
In the worst case scenario, failing to have a handle on sales tax compliance indicates to your buyer that your business practices were… less than thorough. Just like seeing one bed bug always indicates more, failing to be sales tax compliant may telegraph to an otherwise-willing buyer that your financial house isn’t in order and you aren’t ready to be acquired.
How to prepare your business’s sales tax records before selling
Sales tax has changed a lot in the past few years due to the South Dakota v. Wayfair Supreme Court ruling. If your sales tax house is in order despite this chaos, your business will look more attractive to buyers than a business who ignored sales tax compliance and hoped it would all go away.
Lauren Stinson, National Leader of Sales & Use Tax at accounting firm Cherry Bekaert, recommends that you get your business sales tax house in order before you even begin speaking with prospective buyers.
Here’s how to mitigate your sales tax issues before a buyer’s lawyer brings them up at the acquisition table.
Perform an internal nexus analysis
Your business is required to collect sales tax in any state where you have sales tax nexus. Before Wayfair, this meant any state where you had a physical connection such as an office, employee or inventory stored in a warehouse. Post-Wayfair, just doing a high volume of business in a state can cause your company to be required by law to collect sales tax from buyers in the state.
You should be performing a nexus analysis twice a year, or after big sales spikes like Q4. But when getting ready to sell your company, analyze where your business has nexus so you can be ready to answer questions from potential buyers.
TaxJar users can check their Economic Nexus Insights Dashboard to discover where their business has economic nexus.
Calculate past due sales tax liability
In the best case scenario, you performed your nexus analysis and you are completely compliant. You are registered and have been diligently collecting and paying sales tax in states where your business has sales tax nexus.
But, if you do find that you should have been collecting sales tax in other states, figure out how much you should have collected and paid. TaxJar can help. Just link all of your shopping carts, marketplaces and other sales channels to your TaxJar account and we’ll show you how much sales tax you should have collected.
Don’t forget to import previous years’ data to get the full picture of what you might owe. Unfortunately, most states have no statute of limitations on past due sales tax if a vendor was required by law to collect yet hasn’t been.
Further, states charge interest and penalties on past due sales tax, so don’t forget to take those into account when tallying up the full picture.
Consider a Voluntary Disclosure Agreement (VDA)
Once you’ve determined where you have sales tax liability and determined approximately how much sales tax you might owe to states where you weren’t sales tax compliant, you might want to consider a Voluntary Disclosure Agreement (VDA).
This is where a sales tax expert reveals that they are working with an anonymous party (you) who owe sales tax to their state. The state will be intrigued because this is a source of tax revenue they weren’t previously aware of. And a VDA is helpful to you, the business owner, because states will often eliminate some fines and penalties in exchange for you paying a portion of what you owe and agreeing to register and stay compliant going forward.
It’s a win/win for everyone. The state is receiving their sales tax revenue and you no longer have to worry about non-compliance taking your business sale.
Register for sales tax permits
Once you’ve determined that you should be sales tax compliant in new states, the next step is to get compliant by registering for a sales tax permit in that state (or states).
Once you are successfully registered to collect sales tax, you must begin collecting sales tax on all of your sales channels. Forgetting to collect on even one could mean you owe sales tax out of pocket. With the slim margins most e-commerce businesses operate on, this could be the difference between profitability and a buyer bypassing your company for a more sales tax compliant, and profitable, acquisition.
Ensure you’re collecting sales tax correctly
Before letting a potential buyer dig into your books, you should also assess whether you are collecting sales tax correctly on your products.
Many products like food, clothing, textbooks, and medical items are taxed very differently from state to state. For example, grocery items are tax free in California, subject only to varying local tax rates in Georgia, and fully taxable in South Dakota. Because of all this variation, you should be sure that your sales tax collection engine is set to collect the right amount of sales tax from every buyer, no matter their state’s sales tax rules.
Sales tax collection can get very nitpicky. A pair of pants might be non-taxable in a state while a shirt used sold as part of a costume or a work uniform is considered taxable in that same state. With the TaxJar API, simply code each of your products with the correct product tax code and we’ll make sure you collect the right amount of sales tax on each item, no matter how nitpicky state law becomes!
Review historical sales tax returns
Last but not least, before opening up your books to a buyer, check with each state with which you are registered to collect sales tax and be sure your filings and payments are up to date.
States vary in how often they want a company to file. Some will want you to file every month, others quarterly, and some might only want you to file once per year. Since this varies so wildly, it can be easy to miss a filing or payment. Check with the state to ensure you are up to date, and if you’re not, take care of any historical filings (and their associated penalties) before you sell.
TaxJar can help file historical sales tax returns, too!
Before you sell…
Get your sales tax liability in line before even speaking with potential buyers. You’ll telegraph just how serious you are about making the sale work and you’ll be in a strong negotiating position when stepping up to the bargaining table.
Are you worried about your sales tax liability? We recommend speaking with a sales tax expert who can help you with your nexus analysis, VDAs, and shoring up any sales tax liability that might rear its ugly head during your upcoming sale.
Ready to automate sales tax? To learn more about TaxJar and get started, visit TaxJar.com.
