Selling Your Brand? Why Sales Tax Compliance Can Make or Break the Deal

Sales tax compliance not only keeps your brand appealing to potential buyers but can also help you secure deals.

Every business aims to scale, but doing so can also be challenging. Some founders lack the capital or team to sustain their enterprise to the next level. So, they sell it to a larger company with more resources to grow faster. Others are forced to sell for financial relief due to tight cash flow.

Whatever your reason is for selling a business, note that sales tax compliance is a must. You should not overlook sales tax because it could make or break the deal.

Why Sales Tax Compliance Matters When Selling a Brand?

Interested buyers will examine your financial details, including your sales tax compliance, as any tax liabilities could be passed on to them. A diligent buyer will take the time to check outstanding tax liabilities before closing the deal.

Imagine this: you are selling your business because you can no longer afford the high operating costs. An acquisition could aid your financial problems.

However, you have years of back taxes or thousands worth of tax liabilities. You missed the registration requirements and have received numerous late-filing warnings and bulk-sale notifications, which collectively indicate unpaid taxes with penalties and interest.

Some buyers will lose interest in the deal outright. Others might still proceed with the transaction, but do not expect them to accept the same price you offered after learning about your tax liabilities. Instead, to mitigate risks, the buyers may require escrow funds, demand indemnities, or negotiate a lower purchase price.

For better understanding, buyers check sales tax compliance to:

Foresee liabilities

The buyer may inherit the business's outstanding liabilities, including unpaid and underpaid sales taxes with penalties and interest. So, the buyer must ensure the company's compliance status before purchasing to understand what awaits them.

Purchase price

An outstanding liability can reduce the brand's valuation significantly once penalties and interest are taken into account. Buyers are likely to negotiate a lower price once they uncover compliance gaps.

Audit risks

A company with a history of noncompliance raises the risk of future audits. Of course, buyers do not want to take over a business that's on the tax authorities' radar.

Escrows and indemnification demands

When compliance gaps are identified, buyers will likely take measures to protect themselves. They will likely require large escrow accounts and an indemnity agreement.

Reputational damage

Noncompliance can lead to billing errors and disputes, potentially affecting the customer relationship. This is the last thing buyers want, as losing trust in the brand could negatively impact business operations and revenue.

Jurisdiction Use of AI Tools May Increase Audit Risks

Some state tax departments, including those in New York, California, and Texas, have been utilizing AI to increase audits with fewer auditors. The use of AI speeds up the process for two reasons:

Fast proactive audits

AI can quickly analyze a large volume of data and spot discrepancies. Yes, AI systems can detect minor inconsistencies, such as mismatched sales tax returns or spikes in exempt sales.

In New York, the state Department of Taxation and Finance's audits increased by 56% in 2022, despite a 5% decline in the number of auditors, according to CNBC. NY also uses AI to send automated noncompliance letters and identify potential audit targets.

Predictive risk modeling

AI detects patterns of noncompliance when it examines large sets of sales tax data. It can pick up discrepancies in filings, payment histories, and marketplace reports.

Instead of waiting for apparent errors, predictive models score each business based on its likelihood of noncompliance, predicting which businesses are most likely to be noncompliant. This means that companies with minor mistakes or inconsistencies, like late filings or missing exemption certificates, can be flagged for audit.

When tax jurisdictions utilize AI, they identify compliance gaps more quickly and on a larger scale. This raises audit risks for businesses with inconsistencies.

Why You Need Data-Driven Defense

Due to the use of AI in some jurisdictions leading to frequent and proactive audits, businesses are at a higher risk of being audited. Thus, the need for a data-driven defense, which utilizes real-time, verifiable data and automation to stay ahead of audits.

Data-driven defense means having your own system to monitor exposure, manage exemption certificates, and possibly automate registration, filing, and remittance. It keeps you ahead of your sales tax compliance by accomplishing the following:

Centralized and real-time data

All transaction data, including orders, invoices, and exemption certificates, is stored in a secure platform. With a single storage, it's easy to check discrepancies as they occur.

Early exposure detection

A data-driven defense system monitors sales and exposure in states or other countries. Once you cross the threshold, you will be notified to register and start collecting taxes, which will help you avoid penalties and back taxes.

Real-time visibility

Centralized transactions reveal inconsistencies as they occur. The system will prompt a notification whenever a missing or expired exemption certificate is detected. Real-time visibility enables you to correct errors before the revenue agency notices them, thereby lowering your audit risk.

Speedy response to changing rules

Tax rules can change at any time, but the system streamlines the process. It automatically updates the rate tables and product taxability codes in real time, ensuring you use the accurate sales tax rate. You stay on top of your compliance without the last-minute scrambling.

Audit-ready documentation

The system keeps all filings, remittances, and exemption certificates in a centralized and secure storage. When an audit arises, you have an organized document complete with a time stamp. This reduces stress from misplacing documents and keeps you confident 24/7.

Proactive error correction

Since the system uncovers anomalies before they arise, you can resolve the issue before your jurisdiction's tax department's AI flags you for audit. So, when your system notifies you about late filings, mismatched totals, and expired certificates, take action immediately.

Protects business value

Selling or raising capital for your company in the future will subject your business to scrutiny. However, with data-driven defense, you can demonstrate a robust process for your sales tax compliance. This will give investors or buyers the confidence to do business with you.

Don't Let Compliance Reduce Your Brand's Valuation

Your compliance status plays a significant role when selling your brand. All information about your financial health will be examined, with buyers looking out for red flags. A minor compliance gap could lower the purchase price, delay the negotiation, or worse, cancel the deal.

Unpaid or underpaid taxes, late filings, or missing exemption certificates translate to penalties and interest. Buyers do not want to inherit your liabilities, so ensure that you are up to date with your compliance obligations.

Kintsugi automates the most challenging aspects of tax compliance by mitigating risks before they become a problem. Kintsugi monitors your exposure in real time, alerts you when you need to register, and notifies you of expiring certificates.

With Kintsugi's automated filing, accurate tax calculation, and seamless management of exemption certificates, every sale is taxed appropriately and well-documented. You can make a deal with confidence knowing that you are fully aware of your business's value and always audit-ready.

Protect your brand and ensure the success of your deal by partnering with Kintsugi. Book a demo with Kintsugi to safeguard your brand for a seamless experience when selling it in the future.