Sales and Use Tax Due Diligence Emphasis Increases in M&A Activity

The careful examination of sales and use taxes has become increasingly critical in the due diligence process for mergers and acquisitions. According to management consulting firm Alvarez & Marsal, overlooked sales and use tax obligations can result in significant post-acquisition surprises for the acquiring entity.

Changes in U.S. tax legislation, including the Tax Cuts and Jobs Act of 2017, alongside the Supreme Court's Wayfair decision in June 2018, have amplified tax risks for businesses. The Wayfair ruling overturned previous physical presence requirements, allowing for tax collection from remote sellers based on economic nexus. Consequently, companies must broaden their assessment of sales tax nexus obligations across various states.

Within the due diligence framework, it is essential to determine if the target company has met its sales and use tax obligations in jurisdictions where it established nexus, and if taxes have been reported accurately. Key areas of review include sales tax nexus analysis, the taxability of sales and purchases, and the tax treatment of any self-consumed inventory.

Neglecting the thorough investigation of sales and use taxes during the due diligence phase can lead to substantial tax consequences, interest, and potential penalties for the acquirer. This is particularly true as many jurisdictions lack a statute of limitations for unassessed taxes when returns have never been filed.

Alvarez & Marsal advises due diligence teams to systematically evaluate a target company's sales tax nexus footprint and taxability compliance. This approach helps identify and quantify potential tax exposures before the acquisition is finalized, mitigating costly downstream issues.