Guest Article Written by: Derek Hoffman, Partner – Bellatoris Consulting
We’re in a season of strong M&A activity and there aren’t any signs of a slowdown in the foreseeable future. As such, companies with an immediate, or even short-term, interest in selling are in the process of making themselves look as attractive as possible to potential buyers so they can command top dollar when a deal is signed.
Despite the breakneck speed by which M&A deals are completed, acquisitive companies assemble due diligence teams that are very thorough in their review of the target company’s financial health. As you can imagine, these teams don’t limit their time to making cursory reviews of financial statements and audit workpapers. Of all the policies, procedures, and metrics that get examined, one area of analysis that is becoming a hotbed of activity in the due diligence process is sales/use tax exposure.
Annual studies done by the American Bar Association indicate that approximately 85% of domestic M&A deals include purchase price adjustments, which often result in a reduction of the purchase price rather than an increase. When sales/use tax exposures are identified by due diligence teams, the most common issues are:
- Erroneous sales tax collection practices;
- Inadequate procedures for accruing and remitting use taxes; and
- Non-compliance with registration and filing requirements.
Unfortunately for the buyers, they inherit any outstanding sales/use tax liabilities upon acquiring target organizations. Since M&A activity is often touted proudly in public view via press releases and news coverage, the buyers become easy targets for sales/use tax auditors. As such, they protect themselves by making ultra-conservative estimates for outstanding sales/use tax exposures that may be inherited. That essentially means that the sellers often settle for a price that’s less than the true value of the company.
What can you do to ensure top dollar for your company? With respect to sales/use taxes, there are some easy steps to take:
- Examine your invoicing practices to ensure the accuracy of sales tax collections with respect to each product/service being sold in jurisdictions where your company does business as well as where your customers are located;
- Review procedures being followed by your company’s Accounts Payable team to determine whether purchases are being properly reviewed for use tax accrual purposes; and
- Keep an up-to-date nexus study that documents the presence of your company in all jurisdictions where business is being conducted as it pertains to the applicable tax registration and filing requirements.
In the absence of proof, due diligence teams have no choice but to default to making ultra-conservative estimates for outstanding sales/use tax exposures. By taking some simple steps toward managing your company’s sales/use tax compliance procedures, you can easily fend off those ultra-conservative exposure estimates and ensure top dollar for your company.
About the Author:
Derek Hoffman is a Partner with Bellatoris Consulting, LLC. His practice focuses exclusively on sales/use tax issues and his client portfolio includes companies in all industries. Derek can be reached at: firstname.lastname@example.org.