About State Tax Due Diligence
State Tax Due Diligence is generally provided in conjunction with reorganizations, mergers, acquisitions and other corporate transactions to provide assurance that there are no "hidden liabilities" involved in the transaction. Often, potential state tax liabilities are a greater source of exposure than are potential federal tax liabilities. This is particularly true where the acquired corporation is a non-filer in several states.
In performing state tax due diligence services, a tax professional must examine all of the following:
- Sales and Use Taxes
- State Income Taxes
- State Payroll Taxes
- State and Local Property Taxes
- Other Local Taxes
Note that in many cases, the potential exposure for uncollected and/or unremitted sales and use taxes can be alarmingly high. All state have "bulk sales" and "successor liability" provisions that make the purchaser responsible for any unpaid liabilities of the acquired entity. It is therefore imperative that any potential liabilities be ferreted out and provided for in the purchase agreement.
How We Can Help with State Tax Due Diligence
Our state tax due diligence services, like all of our State Tax Services, involve careful and complete research that complies with the AICPA's Statements on Standards for Tax Services (SSTSs), which are enforceable tax practice standards for members of the AICPA. Our examination of applicable documentation is extensive and thorough.
For Sellers and Investment Bankers
For sellers and their investment bankers, we can perform a state tax due diligence audit, in which we identify and mitigate problem areas before the business is put on the market. This will decrease any potential problems that buyers might uncover, resulting in a higher purchase price for the business. We can also assist in organizing physical and digital data rooms that will be used by purchasers.
For buyers, we make a through examination of state tax documents so that you can be completely informed of any significant potential exposure for state tax liabilities and make appropriate adjustments to the purchase agreement.
In performing state tax due diligence services, our tax professionals examine all of the following:
- Prior year tax returns for appropriate reporting and payment
- Any intercompany tax sharing or allocation agreements
- State tax liens and/or tax clearance certificates
- ASC 740, Income Taxes (formerly FIN 48) workpapers and supporting documentation
- ASC 450, Contingencies (formerly FAS 5) workpapers and supporting documentation
- State tax audit workpapers, assessments, waivers, pending matters, etc.
- Nexus studies, checklists or other documentation for non-filing positions
- Many other items that indicate current or potential state tax exposure
Potential liabilities can be estimated and provisions made in the purchase agreement and applicable escrow accounts to mitigate the effects of these potential liabilities. In addition, we can assist purchasers in obtaining tax clearance certificates from various state tax authorities. These tax clearance certificates can release the buyer from liabilities that would otherwise apply under the "bulk sales" and "successor liability" provisions.