Recent Trends in Mergers and Acquisitions

“Without effective tax compliance, M&A deals are not just opportunities—they are potential financial landmines.”

Mergers and acquisitions (M&A) are exciting growth opportunities for businesses. However, they also bring many challenges, with sales tax compliance being among the most critical. Imagine this: you’ve just successfully merged with or acquired another company and are ready to take on the world.

However, complex and often overlooked sales tax obligations lurk beneath the surface and could cost your company big time.

That means only a small fraction of companies come out on top. If you're part of the 30% that get it right, the key to success could lie in how well you handle your sales tax responsibilities post-M&A.

In this blog, we’ll explain essential steps to tackle the sales tax compliance challenges that arise after an M&A and how automation tools like Kintsugi can prevent costly mistakes and streamline your processes.

Nexus: The First Challenge After M&A

One of the biggest hurdles post-M&A is reassessing your nexus, or the connection between your business and tax jurisdictions that require you to collect and remit sales tax.

Sales tax nexus rules have become increasingly strict over the years. Over 40 U.S. states now have economic nexus thresholds based on sales revenue or transaction volume. For instance, if your company surpasses $100,000 in annual sales or completes more than 200 transactions in a state, you’re likely required to register and collect sales tax there**[2]**.

But there’s more: Sales tax rates vary widely across jurisdictions, ranging from 4% to 10%. That’s why it’s critical to evaluate how your M&A impacts your nexus in states where both the acquiring and acquired companies operate.

Questions to Ask Post-M&A:

• Will the acquired company be fully integrated into your existing operations? How will this impact your nexus across multiple states?
• Is the acquired company keeping its legal status? If so, are there sales tax registration updates required?

Failure to reassess your sales tax nexus post-M&A can result in audits, penalties, and hefty fines.

The 5 Stages of an M&A Transaction

Understanding the stages of an M&A transaction can help prepare for potential tax pitfalls. Here’s a simplified breakdown of the typical process:

1. Assessment & Preliminary Review: This includes evaluating potential synergies and tax implications. 72% of failed M&A deals can be traced back to inadequate due diligence in this early stage**[3]**.
2. Negotiation & Letter of Intent: Tax implications—like sales tax obligations—are often covered in initial agreements, setting the foundation for the deal.
3. Due Diligence: This stage involves analyzing all operational, legal, and financial risks. Ignoring sales tax liabilities here can be costly.
4. Negotiations & Closing: Once risks are assessed, final contracts such as the Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA) are signed.
5. Post-Closure Integration: Aligning sales tax responsibilities across newly combined entities is critical to avoiding future audits or penalties.

Assessing Nexus Post-Acquisition

After you’ve determined your integration strategy, a nexus analysis is essential. Here’s what to consider:

• Separate Entity: If the acquired company will operate independently, ensure it’s registered for sales tax in all states with nexus. Non-registration could result in fines as high as 50% of unpaid taxes**[4]**.
• Merged Entity: When merging operations, review combined revenue to ensure it doesn’t trigger new nexus obligations in additional states. 43 states currently have economic nexus laws requiring careful attention to thresholds**[5]**.

The Affiliate Nexus Trap: Watch Out

One less obvious tax burden after an M&A is affiliate nexus, which can sneak up on businesses that aren't prepared.

Affiliate nexus arises when a business has an affiliate operating in another state, triggering tax obligations in that state, even if the two companies run separate operations. This is especially common post-M&A when shared branding, marketing, or operational resources establish a sales tax nexus where none existed before.

What Triggers Affiliate Nexus?

• Shared Marketing: Do your companies share marketing strategies? That could trigger nexus in states where affiliates operate.
• Common Business Practices: If both entities sell similar products or services, you might need to start collecting sales tax in additional states.

Sales Tax Registrations: Don't Skip This Step

Once your nexus analysis is complete, you must update your sales tax registrations. Whether you're merging into one entity or operating separately, sales tax registration is key to avoiding non-compliance penalties.

Key Steps for Registering Sales Tax Post-M&A:

1. Register New Entities: If a new legal entity has been formed, it needs to be registered for sales tax immediately to avoid penalties.
2. Coordinate with Internal Teams: Align tax registrations with departments like HR and payroll.
3. Ensure Seller Cooperation: The selling company should file its final returns and deregister in applicable states.

Why Automation is Key to Sales Tax Compliance Post-M&A

The complexities of handling sales tax across multiple jurisdictions are staggering. Errors can slip through the cracks between managing nexus, affiliate relationships, and updating sales tax registrations. This is where automation can be a game-changer.

Companies using sales tax automation software have reported a 79% reduction in tax filing errors and significant savings in compliance costs[6]**. Leveraging platforms like Kintsugi ensures your business stays compliant and reduces the risk of fines.

Stay Ahead with Kintsugi

By integrating Kintsugi into your post-M&A strategy, you can stay ahead of sales tax challenges while focusing on growth. From nexus analysis to managing complex tax registrations, our automated solutions make compliance seamless.

To learn more, explore our complete guide to sales tax compliance post-M&A.

Sources

[1] www2.deloitte.com/ch/en/pages/mergers-and-acquisitions/articles/mergers-acquisitions-culture.html

[2] salestaxinstitute.com/resources/economic-nexus-laws-by-state

[3] www.pwc.com/gx/en/services/mergers-acquisitions.html

[4] salestaxinstitute.com/sales_tax_faqs/what_is_nexus

[5] taxfoundation.org/article/state-and-local-sales-tax-rates-midyear-2023

[6] www2.deloitte.com/us/en/pages/consulting/articles/state-of-ai-2022.html