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3 Important SALT Considerations in M&A Deals

September 29, 2022

State and local tax issues create traps for the unwary in M&A deals. Here's what you should know.

Editor’s Note: This blog has been updated as of September 29, 2022 for accuracy and comprehensiveness.

When negotiating and structuring M&A transactions, don’t overlook state and local tax (SALT) issues. They can be complex, and tax laws vary dramatically from state to state. Without proper review, SALT issues can be the source of missed liabilities as well as opportunities.

SALT issues generally come into play in one or more of the following ways:

  1. The transaction may expand the buyer’s geographical footprint, exposing it to taxes in states where it was previously exempt. Generally, companies are subject to taxes in states with which they have a substantial economic connection, or “nexus.” Buying a company that has nexus with other states may expose the buyer to those states’ sales and use, income, and franchise taxes. Often times, the target company is not aware of the jurisdictions in which it has nexus and thus a filing requirement., A robust due diligence process will review nexus being created by current business operations and the impact these activities will have on the acquirer post-closing.
  2. The buyer may incur successor liability for the seller’s unpaid taxes. Don’t assume that structuring a transaction as an asset purchase will avoid this liability. There are certain taxes that states will view as “trust fund” taxes. For example, many states impose successor liability for sales and use taxes as well as employer taxes on a buyer of substantially all of a seller’s assets. Special attention should be paid during the due diligence process for the existence of these liabilities, and, if necessary, sufficient amounts should be withheld from the ultimate purchase price to satisfy any amounts due to the states.

    The parties can also consider having the target company come forward and do a voluntary disclosure in states where it’s out of compliance. The advantage of negotiating a voluntary disclosure agreement with a state in anticipation of a transaction is that it brings certainty to the amount of tax and interest due, providing some closure for both buyer and seller on the extent of the liabilities and whether statutes of limitation have closed.
  3. The transaction itself may trigger state or local taxes. In a few states, for example, transfers of certain tangible personal property in connection with an M&A transaction are subject to sales and use taxes, causing a trap for the unwary. In many other states, these transfers avoid tax under an “occasional sale” or other exemption but even in these states, exceptions arise for certain types of assets like transportation assets.

    Similarly, real property transferred in a transaction may be subject to real estate transfer taxes. Typically, these taxes apply in connection only with asset sales, not with stock sales. But some jurisdictions impose the tax on transfers of a controlling interest in a company that owns real estate.

    The point here is that the potential for these types of transactional taxes arising in your acquisition should be vetted as part of the due diligence and negotiation process.

SALT issues may affect a transaction’s value or optimal structure, so it’s a good idea to address them as early as possible. For more information about how SALT issues could affect your upcoming deals — and how you can keep negative tax consequences to a minimum — please contact us.

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