IPT 2016 Sales & Use Tax Symposium Indianapolis, IN. Sales and Use Tax Problems In Mergers and Acquisitions

Transcription

1 IPT 2016 Sales & Use Tax Symposium Indianapolis, IN Sales and Use Tax Problems In Mergers and Acquisitions

2 Presenters Julie Stakenburg Accenture, Director of US Indirect Tax, San Francisco, CA Jordan M. Goodman Horwood Marcus & Berk Chartered, Partner, Chicago, IL

3 Agenda Due Diligence Sales tax implications of transactions What is a Sales Tax? [A Refresher] Contract negotiations Sales tax on the transaction itself Tax-free (?) transactions, mergers, asset transactions Customer/Purchase contract review 3 09/20/201 6

4 Agenda Implications for M&A Successor liability for historic tax liabilities of seller Sales tax on subsequent intra-group transactions among related parties M&A Case Study 4

5 What is a Sales Tax? A tax imposed on consumption of taxable goods and services. Based on a percentage of the price of taxable goods or services. Every U.S. state and the District of Columbia has a sales tax, except five: Alaska Montana Oregon Delaware New Hampshire 5

6 Sales and use taxes Key No State Sales Tax (Alaska allows local sales taxes) Hawaii and New Mexico business taxes operate as a sales tax Local sales tax rules vary from state rules. WA State sales tax map CA OR NV ID UT MT WY CO ND SD NE KS MN IA MO WI IL MI OH IN KY WV NY PA MD VA VT NH MA CT NJ DE DC ME RI AZ NM OK AR TN NC SC AK TX LA MS AL GA As of 08/18/2014 HI FL 6 No statewide tax, local sales tax only

7 What is a sales tax? Rates vary by state Most states permit county, municipal and district sales tax rates. 7,600 separate jurisdictions! Some states permit local variations in sales tax rules: Colorado home rule cities (Denver, Golden) Some states impose different rates on different goods or services Lower rates for: Grocery food Drugs Higher rates for: Rental cars Lodging Entertainment Approx. Average combined state and local sales tax rate = 8.0% 7

8 Contract Negotiations Transaction Sales Tax Analysis Purchase/sales agreement to review Tax indemnity Post-close tax filings (VDA, Final Returns, etc.) Escrow vs. purchase price reduction Tax clause 8

9 Transaction - Sales Tax Analysis Differing state approaches to sales tax on Subchapter C transactions No Set Pattern Most complicated area of sales tax exemptions Special bulk sale notice/reporting rules Sales tax specific rules should not be confused with UCC bulk sales requirement 9

10 Transaction - Sales Tax Analysis Cardinal Rules: 1. Do NOT Assume that a transaction that is tax free for federal income tax purposes is tax-free for state or local sales tax purposes. 2. Do NOT Assume that just because a transaction is exempt for sales tax purposes in one state it is exempt in another. 10

11 Does the transaction involve a sale of taxable goods/services? Tangible personal property Vehicles Machinery Clothing Food Software Taxable services Personal services Restaurants Landscaping Computer services Security services Key question to ask: Is our Target subject to sales and use tax? 11

12 Sales tax on the transaction itself TRANSACTION RISK Sales tax is imposed not on the gain on the transaction but on the GROSS VALUE of the Taxable Assets transferred. Low Rates (compared to income tax) fail to gain attention of deal makers 8% sales tax rate vs. 40% federal and state combined income tax rate BUT Much larger base - Gross Purchase Price Sales tax only applies if transaction fails to qualify for exemption Example: $100m asset deal, Basis in assets is $90m, Purchase price allocated $50m to tangible property RESULTS: Income tax gain = $10m X 40% = $4m 12 Sales tax = $50m X 8% = $4m ($0 sales tax for a STOCK deal)

13 Sales tax on the transaction itself Mergers Mergers Statutory IRC 368(a)(1)(A) SH 1. Under state law, T merges with and into P. T transfers its assets and liabilities to P in exchange for P stock. SH P stock and boot T stock 2. Pursuant to the merger, T liquidates, transferring the P stock to its shareholders. 13 P P stock and boot Assets and liabilities T 3. The transaction is tax free if it qualifies as a statutory merger and satisfies various judicial and regulatory requirements (e.g., COI and COBE). P T assets

14 Sales tax on the transaction itself Mergers P stock and boot 14 Mergers Forward subsidiary merger using parent stock IRC 368(a)(2)(D) P S S stock (fictional) P stock and boot Substantially all assets P stock and boot SH T T stock 1. T merges with and into S, with S surviving. T shareholders receive P stock in the liquidation of T. 2. T assets and liabilities remain in S, separate from P. 3. T shareholders do not recognize gain on the T stock exchanged for P stock. 4. [Notes: Sub all requirement, no SH approval needed, no S stock can be used.] SH P S T assets

15 Sales tax on examples of Subchapter C transactions Mergers IRC 368(a)(1)(A) Statutory merger IRC 368(a)(2)(D) Forward subsidiary merger using parent stock IRC 368(a)(2)(E) Reverse subsidiary merger using parent stock Taxable Mergers 15

16 Sales tax on the transaction itself Mergers Mergers Forward subsidiary merger using parent stock IRC 368(a)(2)(D) State Sales Tax Impact New Jersey/New York Transfer of property to a corporation solely in consideration for the issuance of its stock, pursuant to a merger or consolidation. Triangular reorganization (e.g., IRC 368(a)(2)(D)) using parent stock does not qualify for this exemption. 16

17 Sales tax on the transaction itself Mergers P voting stock and boot 17 Mergers Reverse subsidiary merger using parent stock IRC 368(a)(2)(E) P S T stock T stock P voting stock and boot P voting stock and boot SH T T stock 1. P forms S. S merges with and into T, with T surviving. T shareholders receive P stock in exchange for their T stock. 2. S liquidates by operation of state law. 3. T shareholders do not recognize gain on the value of T stock exchanged for P stock. SH P T S assets

18 Sales tax on the transaction itself Mergers Mergers Taxable merger SH 1. T merges with and into P, with P surviving. P Cash and/or P notes Assets Cash and/or P notes T T stock 2. T shareholders receive cash and/or P notes in exchange for their T stock. 3. T shareholders recognize gain for Federal income tax purposes. 18

19 What isn t subject to sales tax? 19 Most professional services Intangible Property Business entity interests Corporate Stock Partnership interests LLC Membership interests Royalties, Copyrights, Trademarks Goodwill Real property Inventory (DON T FORGET Need for resale certificate.)

20 What isn t subject to sales tax? Exemptions 20 Product Exemptions (Not All States!) Grocery food Drugs Machinery and equipment (NOT ALL STATES) Transactional Exemptions U.S. government purchases State and local government purchases Non-profit organization purchases (e.g., schools, hospitals, churches) Inventory (sales for resale) Occasional, casual & isolated sales SINGLE, MOST IMPORTANT EXEMPTION FOR M&A ASSET DEALS!! ALSO: Specific exemptions for reorg/formation/divisive transactions

21 Sales tax on the transaction itself Mergers Differing state approaches to sales tax on Subchapter C transactions California Statutory merger exempt (no conditions). New Jersey/New York Statutory merger exempt, but solely in exchange for the issuance of its stock. Oklahoma Merger exempt, but only in exchange for voting stock Sales tax rules are different 21

22 Sales tax on the transaction itself Asset deals Occasional, Casual or Isolated Sale Exemptions Broadly worded In addition to (or supplemental of) other transactional exemptions from sales tax. 22

23 Sales tax on the transaction itself Asset deals Occasional, Casual or Isolated Sale Exemptions Types of occasional sale rules: Number of sales (Objective) California No tax if no Seller s Permit; 3 Strikes Rule Kentucky 3 Strikes Rule Type of sales (Subjective) Texas Sale of the entire operating assets of a business or a separate identifiable segment of the business. 23

24 Sales tax on the transaction itself Asset deals Other possible exemptions Resale To the extent inventory is to be acquired: Register the acquiring entity for sales tax in each state where inventory is located before the transaction closes. That way, it can deliver a valid resale exemption certificate. Consider closing condition for Buyer to deliver a resale certificate at closing (even if you are the buyer) 24

25 Sales tax on the transaction itself Asset deals Other possible exemptions Manufacturing equipment exemptions To the extent that any of the assets to be acquired include manufacturing or processing equipment: Many industrial states (typically in the Northeast and South) exempt manufacturing equipment from sales tax. Some require exemption documentation Carefully understand specific rule and qualify each item of equipment for the applicable exemption 25

26 Sales tax on the transaction itself Asset deals Other possible exemptions Electronic delivery of software Some states exempt from sales tax computer software that is delivered in electronic form (e.g., California). In an asset purchase, if substantial value is attributed to software and no other exemptions are available, consider whether the transaction can be structured to deliver the software component of the assets in electronic form to qualify for the exemption. 26

27 Contract Negotiations Purchase/sales agreement to review Tax indemnity language must be broad enough to include indirect taxes Make certain you understand materiality as it is used within the tax section, as well as, the entire contract Post-close tax filings (VDA, Final Returns, etc.) Clearly define the ability and responsibility for filing postclose returns 27

28 Contract Negotiations Post-close tax filings (VDA, Final Returns, etc.) Seller often wants control over the filings DON T GIVE IT TO THEM Allow for Seller input on sales tax return preparation but ultimate control should be assigned in the Contract to the purchaser as it will have successor liability Escrow vs. purchase price reduction Which is better? Note walk them through analysis and impact 28

29 Sales and use taxes Successor Liability Liability on the sale of a business General income tax rule: Income tax liabilities do not follow with the purchase of assets of a business. General sales tax rule: Sales tax liabilities follow with the purchase of the substantially all of the assets of a business. Successor Liability for Sales Tax Caveat Emptor - Buyer Beware! Sales tax follows legal form of the transaction No sales tax on IRC 338(h)(10) election But beware of special rules (California SBE ruling ) 29

30 Sales and use taxes Successor Liability Liability on the sale of a business 30 Buyers can protect themselves Tax Clearance/bulk sales notices May delay transaction May trigger sales and use tax audit Withholding on part of purchase price to meet tax liabilities Contractual Indemnification Due Diligence

31 Sales tax problems on inter-corporate transfers Inter-corporate transfers Sales and use taxes may be important in how a transaction is structured. Post-acquisition considerations Are significant inter-corporate transactions anticipated? Inter-corporate transactions may be taxable. Intra-group transfers within a division may be exempt. Caution on the reliance upon transfers between disregarded entities All but five states follow the federal disregarded entity election for sales tax (AL, MO, SC, TN, WI) For all others, a transfer is deemed to be between two entities 31

32 Sales tax problems on inter-corporate transfers Example of inter-corporate transfer rules Alabama Exemption for inter-group rent, but not other transfers Hawaii No exemption from gross receipts tax for intergroup transfers, including services. Ohio Taxable services provided by sub to parent taxable. 32

33 M&A - Transaction Case Study Facts Proposed transaction: Acquisition of Target stock Small, non-public, closely-held corporation Target business line: Provider of information technology (IT) services Target management discloses they ignored sales tax collection since the are a pure service provider Not registered for sales tax ANYWHERE THIS IS A VERY COMMON SCENARIO 33

34 M&A - Transaction Case Study Information Request Key information request to identify possible exposures Purchase agreement Disclosure schedules Client Contracts if allowed or contract templates Tax Returns State income tax returns Sales tax returns Gross receipts tax returns Business license returns Property tax returns Business Interview 34

35 M&A - Transaction Case Study Information Review 35 Look for Inconsistencies Purchase agreement Significant internally developed/purchased software IP listed Disclosure Schedules Resale contracts for third-party goods Client contracts with software licenses Client contracts for implementation services of internally developed IP Client contract (if allowed) or contract template review Software licenses (w/ or w/out electronic delivery language) Data processing Staff Augmentation Category often missed as taxable in several states PA, CT, HI, NM, OH, SD, WV

36 M&A - Transaction Case Study Information Review Tax return review Where does the target have Sales Employees Property Review the audit history and notices Keep in mind that tax return information is helpful but depending on the state rules, services sourcing is often to a client location office, server, etc. 36

37 M&A - Transaction Case Study Information Review Business interview How are sales initiated? Remote sales force? Client site visits single, multiple? Where are contracts concluded? How are services delivered? Remote location? Client site? Does service delivery depend on the type of service performed? Remote vs. client site To the extent services are delivered to a client site How long is the Target s employee at the client site? Is it a one time effort? Does the Target send customer service reps periodically to meet with the client? 37

38 M&A - Transaction Case Study Contract Negotiations Tax related contract sections Assign clear responsibility (to buyer or seller) for tax filings pre- and post-acquisition Allows for an escrow reserve or lowered purchase price Escrow account Pro Con Cash has been set aside for sales & use tax payments Target traditionally wants more control, documentation, proof of payments Lowered purchase price Con Deal team does not always remember to set aside funds for the VDA s Allows for filing of VDA remember if returns have not been filed there is NO STATUTE OF LIMITATIONS No approval from target preferable 38

39 M&A - Transaction Case Study Contract Negotiations Review liability sections to ensure they are consistent with tax sections Often contract sections will refer to materiality Understanding what constitutes materiality and how it will apply to indirect taxes is critical Control of XYZ letters, VDA filing, payments 39

40 M&A - Transaction Case Study Publically Traded Companies Unique Issues Traditionally, shareholder indemnity or escrow won t be allowed Unfiled tax returns are the responsibility of the purchaser 40

41 Sales and Use Tax Issues with Mergers and Acquisitions Questions? 41