Sales and Use Tax Implications of M&A: Avoiding Costly Mistakes - - PowerPoint PPT Presentation

Sales and Use Tax Implications of M&A: Avoiding Costly Mistakes

Correctly Identifying Assets and Inherited Liabilities and Meeting Compliance Requirements

Today’s faculty features:

1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific The audio port ion of t he conference may be accessed via t he t elephone or by using your comput er's speakers. Please refer t o t he inst ruct ions emailed t o regist rant s for addit ional informat ion. If you have any quest ions, please cont act Customer Service at 1-800-926-7926 ext. 10. TUES DAY, NOVEMBER 19, 2013

Presenting a live 110-minute teleconference with interactive Q&A

Mark Loyd, Partner, Bingham Greenebaum Doll, Louisville, Ky. Myron Vansickel, National Tax Director, S trategic Accounts, Experis, Washington, D.C.

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Partnership Distributions: Avoiding Tax Traps of Mixing Bowl Transactions, Disguised Sales, and 751(b)

• Nov. 19, 2013

Myron Vansickel, Experis myron.vansickel@ experis.com Mark Loyd, Bingham Greenebaum Doll MLoyd@ bgdlegal.com

Today’s Program

Overview of Challenges Related to Mergers & Acquisitions [Myron Vansickel] Risk Management Opportunities [Myron Vansickel] Risk Management Opportunities: Nexus and Compliance Challenges [Mark Loyd] Due Diligence Best Pract ices [Mark Loyd] S lide 8 – S lide 10 S lide 11 – S lide 30 S lide 31 – S lide 38 S lide 39 - S lide 41

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Circular 230 Disclaimer

• This presentation contains general educational information only and Experis

is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decisions or action that may affect your business. Before making any decisions or taking any action that may affect your business, you should consult a qualified professional advisor. Experis shall not be responsible for any loss stained by any person who relies on this presentation. This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

CHALLENGES RELATED TO MERGERS & ACQUISITIONS

Myron Vansickel, Experis

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Challenges Related to Mergers & Acquisitions

• Acquisition of Ownership Interests

Ownership interests may include stock of a C corporation, S corporation or a partnership interest. Each of these types of acquisitions will likely include all unrecorded liabilities of the target. Therefore, a buyer may want to perform more due diligence review for this type of acquisition

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Challenges Related to Mergers & Acquisitions

• Acquisitions of Assets

Tangible, intangible and real estate may represent the types of assets that may be purchased directly. The buyer may be potentially liable for unpaid sale sand use tax liability for the seller, up to the purchase price of the assets in most states.

RISK MANAGEMENT OPPORTUNITIES

Myron Vansickel, Experis

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Risk Management

• Asset Purchases

Here you may become liable up to the purchase price for the seller’s tax obligation if you do not protect yourself by filing “bulk sales” notifications in the states where assets are located. Generally, this relieves the purchaser form the assertions of successor’s liability for most states and the requirements for notification will vary form state to state.

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Managing Sales Tax on Acquisitive Transactions

• Identification of Non-Taxable & Exempt Items

Cash, marketable securities, real estate and other intangibles are not subject to sales tax. The sales tax is applied to the tangible personal property based on the sales price allocated to this property. There may be sales tax exemptions on various property on a state by state basis, e.g., manufacturing equipment.

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Managing Sales Tax on Acquisitive Transactions

• Allocation of Purchase Price

The allocation of purchase price is very important in determining the sales price for the tangible personal property purchased. Valuations may need to be performed to determine the Fair Market Value of the assets purchased. Book value may not be indicative of the true FMV! Book value is based on useful life and depreciation methods that may not reflect the true value of assets if sold between a willing buyer and seller.

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Managing Sales Tax on Acquisitive Transactions

• Allocation of Purchase Price Methodology

IRC Reg. §1.338-6 and Reg. §1.338.7 provide the residual methodology for allocating purchase price. The Regulations provide seven classes of property.

• Class I: Cash and cash equivalent;.
• Class II: Actively traded personal property as certificates
• f deposit and foreign currency;

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Managing Sales Tax on Acquisitive Transactions

• Allocation of Purchas Price Continued

Class III: Accounts Receivable, mortgages, and credit card receivables arising from the ordinary course of business. Class IV: Stock in Trade (inventory) Class V: All assets not in Classes I, II, III and IV. (furniture and fixtures; equipment)

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Managing Sales Tax on Acquisitive Transactions

• Allocation of Purchase Price Continued

Class VI: All IRC Code Sec. 197 intangibles, except good will and going concern value. Class VII: Goodwill and going concern Goodwill is not valued separate, but is the remainder of the purchase price after other class has been identified and valued.

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Transactions Structuring Using Entities

• Asset Purchase: An acquisition of all of most of the

assets and liabilities of a company or a line of business. Generally, do not inherit tax liabilities except for sales taxes under successor liability rules. Remember that the states are going to look at the Fair Market Value of the assets purchased in computing sales tax due.

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Transactions Structuring Using Entities

• Stock Purchase: A business transfer where either the

corporation stock or partnership ownership interest is transferred. The sales tax treatment of a merger or acquisition generally depends on its form. State sales and use tax apply only to transfers of the tangible personal property, so transfers of corporate stock and securities are not subject to sales tax.

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Transactions Structuring Using Entities

Structure of the Deal – Sales/Use Tax

• A Reorganizations: Many states provide specific

exemptions for transfers pursuant to a statutory merger or consolidation

• B Reorganizations: Stock-for-stock reorganizations

should not have any sales or use tax implications, since the property transferred is intangible property

• C Reorganizations: An acquisition of corporate assets for

stock requires careful examination since the corporation is acquiring tangible property, unless some exemption applies

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Transactions Structuring Using Entities

• D Reorganizations: Typically involve transfers of property

to a corporation, for stock in that corporation. The property transfer is potentially subject to sales tax, however many states have exemptions for transfers to newly-formed corporations in exchange for stock

• Recapitalization on E: Does not trigger sales or use

taxes since recapitalization involved transfers of intangibles.

• F Reorganizations: Transactions that are a “mere change

in identity, form or place of organization” generally are not subject to sales tax.

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Transactions Structuring Using Entities

• Triangular Mergers: The federal income tax rules provide

tax-free reorganization treatment, however depending on the transaction – Forward triangular merger – typically subject to sales tax unless a specific exemption exists – Reverse triangular merger – no sales tax on the target’s assets

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Transactions Structuring Using Entities

Different tax outcomes by two different states regarding tax- free reorganizations subject to sales tax.

• New York exempts the transfer of property to a

corporation in a statutory merger or consolidation, but

• nly if the transfer is in exchange for the acquiring

corporation’s stock. N.Y. Regs. §526.6(d)(7)

• Maryland apparently exemption applies to transfers in

exchange for stock of the parent of the acquiring corporation as well as to transfers in exchange for stock

• f the acquiring corporation itself. MD. Code Ann. Tax-
• Gen. 11-209(c)(1)(i)

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Transactions Structuring Using Entities

• The New York exemption may apply when the parent

corporation can form a new subsidiary and merge it into the target with the target surviving the merger and the target shareholders receiving parent stock in the transaction.

• Where the merger of the target into the parent’s

subsidiary which the subsidiary survives and the target corporation receives stock of the parent is not exempt from New York Sales tax.

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Transactions Structuring Using Entities

• Maryland takes a broader approach and their exemption

for all transfers of property in transactions that qualify as tax free reorganizations under IRC §368. (see prior citation)

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Occasional Sale Exemption

“ Occasional or casual sale” refers to an isolated transaction is which tangible personal property or taxable services is sold other than in the ordinary course of repeated and successive transactions. Otherwise not a “retail” sale. Some states provide an exemption for “occasional or casual sales” that my be applicable to asset transactions when all

• f most of a biusness assets are purchased.

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Liability of Purchaser for Seller’s Tax Obligations

“Bulk sale” notification. Some states will require written notification within 10 days prior to a sale of business assets and/or the buyer must withhold taxes owed by the seller until the seller can clear its tax obligations. The asset sale that may qualify for this is one where the entire assets of the business are sold or a substantial portion of a business line.

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Liability of Purchaser for Seller’s Tax Obligations

It is imperative to do your due diligence when acquiring a business and especially when it come to sales and use tax. It can add cost to the acquisition that was not anticipated. Many buyers will ask for “tax clearance” certificates to be delivered a the time of closing to prove that the seller has paid all taxes due at that time.

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RISK MANAGEMENT OPPORTUNITIES: NEXUS AND COMPLIANCE CHALLENGES

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Nexus

• A. Ne w Fi l i n g Ob l i ga t i o n s Re su l t i n g f r o m

Ac q u i si t i o n

• B. I m p a c t o n Cu r r e n t Ne x u s Po si t i o n s
• C. Op p o r t u n i t i e s f o r Re so l u t i o n ( VDA, e t c . )

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Nexus: New Filing Obligations Resulting from

Acquisition

• Physi cal Locat i ons of Tar get Com p any
• Headquarters
• Manufacturing Facilities
• Distribution Facilities
• S

ales Offices

• Retail Locations
• Pr esence of Tar get ’ s Em p l oyees
• Tar get ’ s Econom i c Act i vi t i es

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Nexus: New Filing Obligations Resulting from

Acquisition

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Nexus: Impact on Current Nexus Positions

Jurisdictions in which Target Filing Sales Tax Returns Jurisdictions in which Acquirer Filing Sales Tax Returns Target Nexus- Issue Jurisdictions Acquirer Nexus- Issue Jurisdictions

Manage

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Nexus: Opportunities for Mitigation or

Resolution (VDA, etc.)

• Am nest y
• Vol unt ar y Di scl osur e Agr eem ent s
• “ Op p or t uni t y” t o Begi n Fi l i ng
• Ot her St r at egi es
• Not Acquire Aspect of Target?
• Other S

tructural Opportunities?

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Compliance Challenges

• Nexus – Fi l i ng Ob l i gat i ons
• Tax Base Det er m i nat i ons
• Application of Exemptions
• Audit Experience
• Resal e & Exem p t i on Cer t i f i cat es ( Sur vi vor
• f M& A Tr ansact i on?)
• Aud i t s: Pr i or ; Ongoi ng; Fut ur e

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DUE DILIGENCE BEST PRACTICES

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Documents to Obtain and Review

• Li c e n se s
• Tax Cal e n d ar
• Tax Re t u r n s
• Tax Re t u r n Wo r k

Pap e r s & Re l at e d Do c u m e n t s

• G/ L Ac c o u n t s
• Re sal e & Ex e m p t i o n

Ce r t i f i c at e s

• Sal e s & Use Tax

Han d b o o k ( s)

• Pl an n i n g Me m o r an d a
• Pr i o r Au d i t s
• Ot h e r Re l e v an t

Do c u m e n t s

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Anticipate Post-Acquisition Issues

• Ne x u s Po si t i o n s
• S

ales Tax “ Footprint”

• Tax Filings
• Tax Base Po si t i o n s: Ex e m p t i o n s, Cr e d i t s, Et c .
• Do c u m e n t at i o n & Su b st an t i at i o n I ssu e s
• Pr i o r Au d i t Ef f e c t o n Cu r r e n t Au d i t s
• Fi n an c i al St at e m e n t I m p ac t

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