State Tax

Sales and Use Taxes: Mergers and Acquisitions (Portfolio 1370)

  • This Portfolio discusses the principle sales and use tax concepts that should be addressed – but are often overlooked – in structuring a merger or acquisition.

Description

Bloomberg Tax Portfolio, Sales and Use Taxes: Mergers and Acquisitions, No. 1370, discusses the principle sales and use tax concepts that should be addressed – but are often overlooked – in structuring a merger or acquisition. In addition, the state tax provisions applicable to other common corporate transactions, including bulk sales, liquidations, and incorporations are examined. The Portfolio also discusses the general concepts that will impact most of these transactions, such as the dividing line between tangible and intangible property and exemptions (e.g., the “casual sales” or “isolated sales” exemption, the “sales for resale” exemption, and other state–specific exemptions). The Portfolio concentrates on generally applicable principles with a particular focus on the laws of some of the larger states.

Service providers also face complex nexus issues. In states that do not have clear nexus rules, taxpayers may have a state assert its taxing jurisdiction on the basis of either very few contacts or novel nexus theories. These taxpayers do not receive the protection of a statute of limitations on assessment, as they reasonably believed that they were under no obligation to file income tax returns in such states. Because most states’ sales and use tax statutory schemes were originally designed to simply impose a tax on retail sales, the merger and acquisition provisions of most statutes are hard to interpret, and can be very inconsistent. The sales tax planner must be ever diligent when involved in complex M&A transactions to insure that sales tax transaction form is rigidly followed in order to take maximum advantage of exemptions, where available, and to avoid triggering a taxable sale which could have been prevented.

The Portfolio discusses both of these topics generally, paying particular attention to the applicable pronouncements of the U.S. Supreme Court. The discussion following covers nexus and apportionment as applied on an industry–specific basis. Fundamentally, in any M&A transaction, because there is always a presumption of taxability where there is a transfer of tangible personal property, each significant asset must be examined to see whether the sales tax normally applies, and whether the various exemptions such as sale for resale, manufacturing processing, R&D, casual or isolated sales, or reorganization provisions can be applied. A chapter devoted to due diligence considerations analyzes the practical aspects of M&A transactions and their impact on sales and use tax compliance. For example, some jurisdictions exclude property such as motor vehicles and aircraft from the occasional sales exemption.

Subscribers to the Internet version of the Portfolio will find late-breaking developments reported in the Bloomberg Tax Daily Tax Report – State.

This Portfolio should be cited as Cronin, 1370 T.M., Sales and Use Taxes: Mergers and Acquisitions. Within the Multistate Tax Portfolio Series, however, references to the Portfolios will include only the Portfolio numbers and titles.

Table of Contents

1370.01. INTRODUCTION
1370.02. ACQUISITIONS, MERGERS, AND REORGANIZATIONS
1370.03. GENERAL SALES AND USE TAX CONCEPTS APPLICABLE TO ACQUISITION
1370.04. SALES OF ASSETS
1370.05. NEXUS IMPLICATIONS OF ACQUIRING CERTAIN ENTITIES
1370.07. DROP-KICKS: DROP-DOWN OF ASSETS FOLLOWED BY STOCK SALE
1370.08. EXERCISING DUE DILIGENCE FOR M&A SALES TAX ISSUES

John Cronin
John Cronin
Partner (Retired)
Deloitte Tax LLP
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