State Tax Considerations When Buying or Selling a Business
Merrill Barter, Managing Director, Tax Practice
Selling or buying a business is an exciting transaction. But as with every transaction, taxes will likely play a role, and it’s best to be aware of the potential tax consequences before signing on the dotted line.
Two prior articles in our firm’s inaugural Professional Services Insider newsletter discussed some of the federal tax pros and cons from the seller’s and buyer’s perspectives of various entity structures used in these transactions. This article is meant to provide a high-level overview of things to consider from a state tax perspective when selling or buying a business.
Often, the buyer has the greater state tax risks in a business sale transaction, as will be discussed below. However, there are state tax considerations for the seller.
- Has the business filed historically in all the states in which it should have, for both sales tax and income taxes?
- Depending on the structure of the transaction, a seller may still have exposure for prior liabilities related to unfiled returns, for example, after the transactions closes.
- The buyer’s advisors will evaluate the business’ state filings, and if all the required returns have not been filed, the buyer may require that the seller bring the business into compliance in the states, obtain tax clearance and/or require that an escrow account be established to cover any liabilities related to past business activities.
- The need to address prior years’ state compliance issues during the transaction process can add significantly to the time it takes to close the transaction. It will certainly increase the seller’s expenses, and can even derail the transaction entirely.
- Has the state income tax treatment of any gain on the sale been evaluated in the states in which the entity did business?
- Some states have lower capital gains rates. Gains on the sale of stock are typically taxed in the seller’s resident state, regardless of where the entity actually does business. If residency is legally established in a state with lower (or no) personal income tax, the state tax burden can be reduced.
- If the sale is a deemed asset sale of a pass-through entity, some states will tax a portion of the gain based on the entity’s prior in-state activities (i.e. sale, payroll and property).
- If the sale is an asset sale, does the state impose sales tax on bulk sales, and if so, does the seller have any collection requirements?
The buyer’s state tax considerations in a business sale transaction often mirror those of the seller.
- Has the business filed all the required state tax returns prior to the sale? This is especially important in a stock purchase transaction. If the business hasn’t filed all the required state returns:
- Are the seller’s records sufficient to quantify the potential tax liabilities related to prior periods?
- Is the seller willing and able to address prior filings and related liabilities and obtain tax clearances before the closing of the transaction, or within an agreed-upon time after the transaction?
- Should an escrow account be established to cover any state tax liabilities related to prior periods?
- Have the state income tax implications to the buyer been evaluated?
- If federal tax elections are made as part of the transaction, do the states in which the entity files follow these elections?
- If the transaction is a stock purchase, have state income tax carry-overs been evaluated?
- If the transaction is an asset purchase, have sales taxes been considered?
- Does the state tax “bulk sales” of assets, and if so, what exemptions exist, if any, and what is the associated liability?
- Are any of the assets being purchased subject to different sales tax rules? For example, if vehicles required to be registered are being purchased, have the related sales tax costs been considered?
State tax issues related to business sale transactions are complex, and above are just some of the state tax matters that should be considered by sellers and buyers. It is always best to consult with an experienced tax advisor prior to entering into a transaction. If you would like to discuss further, please call your BNN service provider at 1.800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.