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State & Local Tax (SALT) Issues in Mergers & Acquisitions: What Buyers Need to Know

 

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When buying a company, it’s not enough to look only at federal taxes. Consider SALT issues in Mergers & Acquisitions. State and local taxes (SALT) can create hidden risks that affect the purchase price, deal structure, and even what happens after closing. If overlooked, these liabilities can surprise buyers and sour the deal. In this article Allison Civello, CPA presents a practical framework for integrating SALT into the M&A process.

Why SALT Matters

  • States are cracking down on tax compliance, especially with online business models and remote work.
  • Companies may owe taxes in states where they have customers or employees, even without physical offices.

Examples

  • A software company headquartered in LA, with customers across the nation, may have crossed the sales threshold of $100,000 in WA creating the potential of sales tax and B&O tax exposure, even without a physical presence.
  • A service company headquartered in LA, sending employees to various states to perform services, may have income tax exposure and withholdings tax requirements in the states where the service is provided.

Income & Franchise Taxes

  • Risks include missing returns, misapplied rules, or misunderstanding how states calculate income.
  • Buyers must check:
    • Nexus (where the company is considered taxable) and how each state “sources” revenue.
    • Whether the company relied on limited protections like Public Law 86‑272.
    • Complications from related‑party transactions or differences between federal and state rules.
  • Net operating losses may not carry over as expected, depending on federal and state limits.

Sales & Use Taxes

  • Sales tax is often the biggest SALT problem found in due diligence, especially after the 2018 Wayfair case.
  • Common issues: digital goods, subscription services, drop shipments, or missing exemption certificates.
  • Small mistakes can add up over years, with penalties and interest.
  • In some states, buyers can inherit the seller’s unpaid sales tax even in asset deals.

Deal Structure & State Rules

  • Whether the deal is a stock purchase or asset sale changes how states apply taxes.
  • Federal elections like Sec. 338(h)(10) may look attractive but can create unexpected state liabilities.
  • States vary widely in how they treat gains, depreciation, and apportionment, so buyers must model impacts carefully.

Industry & Indirect Taxes

  • Beyond income and sales tax, industries face special taxes:
    • Telecom: utility and 911 fees
    • Construction: contractor use tax
    • Energy: severance and fuel taxes
    • Health care: provider fees
  • Software‑as‑a‑service (SaaS) is taxed differently across states; 22 states tax it in some form.

Successor Liability & Audits

  • Buyers can still be responsible for old taxes, even in asset deals.
  • States like New York require special steps to avoid inheriting unpaid sales tax.
  • Ownership changes often trigger audits, so buyers should review past reports and open issues.
  • Tools like indemnification clauses, escrow accounts, or voluntary disclosure agreements can help manage risk.

Post‑Closing Integration

  • Tax work doesn’t end at closing. Buyers must:
    • Update registrations and accounts in all states.
    • Consolidate exemption certificates and tax systems.
    • Ensure the combined business doesn’t create new tax obligations in other states.
  • Poor integration can lead to ongoing compliance failures.

Bottom Line

State and local taxes are now a central part of M&A strategy. Ignoring them can cost buyers real money and create long‑term headaches, so consider SALT issues in Mergers & Acquisitions. Careful due diligence, awareness of state rules, and smart planning protect deal value and client interests. State and local taxes (SALT) can create hidden risks that affect the purchase price, deal structure, and even what happens after closing. Questions about a potential acquisition and SALT implications? Contact us today.

 

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