State and Local Tax Due Diligence

By: George Rendziperis, J.D.

Is State and Local Tax (SALT) due diligence part of your merger and acquisition checklist?  If not, a seller who is not compliant with state and local tax laws may cause a buyer headaches after the transaction closes. 

What is due diligence? Due diligence is the process of identifying and analyzing the risk associated with acquiring a business or selling a business. State and local tax due diligence identifies and analyzes state and local tax risks and exposures for such taxes as income/franchise, gross receipts, sales and use, withholding, and property taxes. 

Does buying the assets of a company relieve the purchaser of any SALT issues that may arise as a result of the seller operating the business?  Yes.  

Buying the assets of a company does not relieve the purchaser from state and local tax issues if the seller was not following or compliant with state and local tax laws, regulations and rules.

Certain state and local taxes are considered trust fund taxes.  These taxes include employee withholding and sales and use taxes.  Taxpayers must collect such taxes on behalf of the state and remit such taxes to the state.  If taxpayers are not compliant with the states laws and rules regarding these trust fund taxes, states will impose personal liability on the owners of the company or successor liability on the purchaser of the company.  

If you are considering buying a business, or selling your business, you must consider the risks or tax exposure associated with such a transaction. Based on our experiences, we recommend that you prepare for the due diligence process. 

As a buyer, we recommend that you include state and local taxes as part of your due diligence process.  As a seller, we recommend that you review your state and local tax footprint and determine whether you have any state and local tax exposures and address such exposures before the buyer starts its due diligence process in connection of purchasing your company.

Please contact George at Grendziperis@hancockaskew.com or 512.663.0132 to discuss this post.