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Those of you who have followed Boyne Capital’s series of whitepapers will recall our recent monograph on the importance of learning about and adjusting to tax code changes. Over the years, we’ve counseled many of our portfolio partners on their tax situations, which vary by industry and business structure. It’s a prime example of the breadth of financial, operational and management services Boyne offers to our portfolio companies, beyond the access to capital essential for funding operations and growth. As such, we sometimes uncover challenges in portfolio companies’ tax situations that require the expertise from specialist firms who can provide a deeper perspective and valuable recommendations.
Insights from specialists are crucial when a business is contemplating a change in ownership. John Cooney of Briggs & Veselka Company (one of Boyne’s valued business solutions partners) raises the alarm about an often overlooked tax issue that many companies are often unaware of. As you’ll discover in this article, sales tax obligations are not as clear as you might think, and they can scuttle a deal quicker than you can say “Ben Franklin”. Read on for more…
courtesy of Briggs & Veselka Company
Imagine a family business passed down for generations where the newest generation is not as interested in running the business. The parents and grandparents knew the day might come, and a collective decision is made to sell the business. So, with the blessings of the previous generations, a valuation is obtained, and the business is put on the market. Pretty quickly, offers are received, and it looks like everyone will come out very well. The prospective buyer, however, asks their accounting firm to look at how the business handled sales tax filings, and what they find kills the deal.
This scenario and other similar scenarios are happening all the time. Further, states have increased their audit and enforcement activities with respect to identifying companies that are not in compliance with sales and use taxes, and states are assessing tax on these unsuspecting companies in record numbers. The reason is because of a Supreme Court decision made in 2018 that drastically changed the rules.
The ability for states to impose sales and use tax filing requirements on remote and foreign companies is dependent upon the level of contact, or nexus, the company has with that state. Historically, the Supreme Court had always ruled that there needed to be some sort of physical contact such as an employee, sales agent, inventory, or other physical contact. However, a state’s ability to impose their laws on out of state companies has just recently been drastically expanded with South Dakota v. Wayfair, Inc. – 138 S. Ct. 2080 (2018).
What did the Supreme Court decide?
In this case, the Supreme Court determined that $100,000 in sales revenue or 200 transactions in a 12-month period was enough activity to establish nexus even with no physical presence.
How does this impact companies today?
Since the decision was made in the summer of 2018, virtually every state with a sales tax has adopted some form of “economic nexus” policy that embraces the Wayfair decision. Companies that sell into multiple states now likely have new sales and use tax collection and filing requirements. Since sales tax is paid by the customer and not the seller, correctly registering for sales taxes and collecting the tax on these remote sales would result in a company not being out of pocket for the tax. However, if a company has established a filing requirement based on $100,000 in sales or 200 transactions over a twelve-month period and does not collect the tax, these monies could be assessed on the seller as a result of a sales tax audit.
It is incumbent upon sellers to evaluate their activity outside of their home state to determine if there is physical or economic nexus.
The challenge is that every state has adopted different rules with differing effective dates. For example, Texas has adopted a $500,000 threshold, while most other states have a $100,000 threshold. If a Texas seller is selling into Oklahoma and exceeds $100,000, they now have nexus. An Oklahoma seller selling into Texas, however, does not have nexus until they reach $500,000 giving the out-of-state company a clear advantage with Texas customers.
What are the next steps companies should take?
Any company considering selling their business or acquiring a new business should evaluate how these new sales tax rules may impact the balance sheet. States are now allowing for Voluntary Disclosure Agreements which may significantly reduce penalties and interest if the company contacts the state before the state contacts the company. The states are hiring more auditors and enforcement agents. Are you ready?
Understanding your company’s sales tax obligation across its entire sales territory is critical to sound financial health and to positioning your business for the next stage. Tax liability is just one issue that needs to be addressed. Are there other ownership, governance or contractual issues that should be resolved? What don’t you know that you should be aware of?
In addition to providing you with the funding to reach the next stage and beyond, Boyne Capital can help you assess these potential issues by conducting a thorough review of your company’s profile, tapping the resources of subject matter experts in accounting, legal, regulatory compliance, HR and other disciplines as needed to give you the complete picture. Contact Boyne Capital to help you evaluate where you are and where you should be going.
Founded in 1973, Briggs & Veselka is Houston’s largest independent accounting firm and the third-largest independent CPA firm in Texas. Offering sophisticated audit, consulting and tax services for a wide range of industries, Briggs & Veselka experts help clients overcome the challenges presented by today’s most complex accounting and finance issues.