There is no question that the e-commerce and digital world have changed the way companies do business. With many companies moving to remote workforces, online selling and services, and a lack of uniformity in state and local tax (“SALT”) laws, understanding a business’s or a business owner’s SALT responsibilities has become difficult. As the M&A transaction landscape has changed due to the One Big Beautiful Bill Act (“OBBBA”), market uncertainty and changing tax laws, it is a good time to ensure that a business has complied with all necessary SALT filings and to assess potential savings opportunities.
Why SALT Readiness Matters in Today’s M&A Environment
As OBBBA has made some legislative changes related to mergers and acquisitions, companies should be ready to go to market without the fear that SALT exposure may delay closing. SALT due diligence has the potential to halt any deal, due to the size and nature of potential SALT exposures. With many states imposing economic nexus and companies no longer doing business in a few states, SALT due diligence can uncover an array of SALT issues. A SALT check-up is an invaluable tool for any business to ensure the correct SALT filings have been made and to prepare a company for when a buyer conducts their own SALT due diligence.
What Buyers Look for in SALT Due Diligence
Before any deal goes through, the buyer requests due diligence to identify potential tax exposures. This gives the buyer an opportunity to understand the risks associated with purchasing, acquiring or infusing capital into an entity. The SALT due diligence encompasses numerous tax types and all 50 states. Due to the breadth of the analysis and the unique nature of many state and local tax types, a company may be shocked to learn that they have not been compliant with numerous SALT filings and requirements. Recent deals that have been halted due to SALT exposure include issues with 1099 contractors; sales tax not collected in multiple states and missed non-resident withholding returns.
Key Areas Evaluated in a SALT Check-Up
A SALT check-up can identify areas of weakness and help the company determine how it can become compliant with all its tax filings. In addition, the SALT check-up can present opportunities for tax planning and potential savings.
Main areas of focus include:
- Income/franchise/gross receipts taxes
- Sales and use tax
- Payroll tax
- Unclaimed property
- Property tax
Based on the nature of the business, one area may be more of a focus than another. An entity that issues a large amount of gift cards should be mindful of its unclaimed property requirements. Whereas an entity that is selling taxable goods or services throughout the U.S. should ensure that sales and use tax returns have been filed in all states where Wayfair thresholds have been met. In addition, any sales to exempt customers or sales for resale should have the requisite exemption certificates on file to meet the state requirement for exemption. Any missing exemption certificates should result in exposure.
Income Tax Exposure and Planning Opportunities
Income/franchise/gross receipts taxes should affect every type of entity, although the exposure would depend on the type of entity and the ultimate taxpayer in the structure. Potential savings could be found in an apportionment sourcing analysis for a service business. Depending on state laws and the location of the customers and employees, receipts may be incorrectly sourced, resulting in a larger tax burden. Finally, every company that has employees is required to withhold and file both state income tax and unemployment insurance. Depending on the states, the classification of employees and contractors, as well as the type of compensation, could create large withholding tax exposures.
Gaining Control Before the Deal Process Begins
As noted above, buyers are typically the driving force behind due diligence, exerting control over it. Typically, deals have a strict timeline, and sellers are required to upload documentation quickly. A SALT check-up can allow a seller to take control of the information and understand fully what it is handing over to a buyer. In addition, a SALT check-up will help a seller prepare for any SALT-related questions that may arise during a buyer’s due diligence.
How a SALT Check-Up Can Protect Deal Value
At Grassi, our SALT practice can perform a SALT check-up, allowing the seller to address any potential SALT exposure by filing back returns or entering into a Voluntary Disclosure Agreement (“VDA”) with any state in which it owes taxes for any tax type. Finally, when a buyer finds exposure, the exposure amount will typically be put into escrow by the seller, thus reducing the overall purchase price at closing. By clearing up potential SALT liabilities, the SALT check-up can help maximize the purchase price in a deal.
If you are interested in a SALT Check-Up, please contact Catherine M. Sabol, JD, SALT Partner and Practice Leader at CSabol@grassiadvisors.com.
