With the Supreme Court's South Dakota v. Wayfair ruling and the elimination of the “physical presence” standard, a number of issues are raised in the realm of mergers and acquisitions for both buy-side accountants and sell-side accountants.
As companies grapple with applying the Court’s decision, there will be a heightened discrepancy between liability assessments between buyers and sellers – with some buyers wishing to be overly cautious, thereby driving up their calculation of contingent liabilities.
As you may know, the ruling clears the path not only for states to enact economic nexus provisions for sales and use tax purposes, but any doubt as to whether the physical presence standard applied for income, gross receipts and excise tax purposes has also been removed.
However, while some constitutional limits still apply to a state’s ability to impose its taxes upon out-of-state companies, there is no bright line rule that taxpayers can rely upon.
The U.S. Supreme Court’s decision in Wayfair was limited to the facts of that case – a $100,000/200 sales threshold with a multimillion-dollar corporation pitted against a small population state that was a member of the Streamlined Sales Tax Agreement. Therefore, much uncertainty still exists when it comes to M&As.
One issue concerning buyers should be a concern over successor liability for unpaid state and local taxes of the target corporation. Several states impose successor liability for income, sales, use, and employment taxes when an acquiring entity purchases all or substantially all of a selling entity’s assets.
Concomitantly, responsible officers should be concerned with potential personal liability of an acquired or surviving company. Sales and use taxes are treated as trust fund taxes in most jurisdictions, with the seller responsible for collecting and remitting the tax and the responsible officer liable for a failure of the company to fulfill such obligations.
Because many jurisdictions do not have a statute of limitations for non-filers, a non-compliant seller may have exposure for unreported tax liabilities for as many years as the company had nexus with the particular jurisdiction – compounded by interest and penalties. In mergers and acquisitions, both potential successor liability and responsible officer liability may be heightened in light of Wayfair as states expand their nexus provisions, requiring thorough due diligence.
There are a number of states that enacted remote seller laws prior to the decision in Wayfair. However, ensuring the seller’s compliance as of the effective date of the remote sales tax legislation post-Wayfair is not enough.
For instance, Pennsylvania’s remote sales tax legislation with a $100,000 threshold takes effect July 1, 2019. However, its marketplace sales legislation was already in effect as of March 1, 2018, where a remote seller with $10,000 of sales into the state annually was required to either collect or abide by notice and reporting requirements. Failure to do so results in hefty fines.
Consideration must be given for any laws that existed prior to Wayfair, such as notice and reporting requirements, like those in Pennsylvania and Washington, or expanded views of physical presence – such as Massachusetts’ “cookie nexus” (dating back to 2017). Therefore, it is not only important to ensure compliance with the post-Wayfair laws, but also the pre-Wayfair laws.
Even those sellers who may have been compliant pre-Wayfair are not necessarily immune from retroactive application of the decision. While many states have vowed to not retroactively apply Wayfair, those vows have been limited to the sales and use tax arena.
For instance, Florida previously supported the proposition that Wayfair should only be applied prospectively. Wayfair, Brief for Colorado, et. al., 2018 WL 1203460 (Mar. 5, 2018), at 18-19. However, post-Wayfair, in a case involving a refund of tobacco excise taxes, the Florida Attorney General argued that “Wayfair controls the outcome of this matter, and there is no reason that case should not be applied retrospectively as well as prospectively.” Global Hookah Distributors, Inc. v. State of Florida, Case No. 2017-CA-1623 (Fla. 2nd Cir. Ct.). Thus, while a state may decide not to apply Wayfair retroactively for sales and use tax purposes that is not a guarantee that it will not do so for other tax liabilities.
Further, states may argue that they are not applying Wayfair retroactively – relying upon the previous income tax and gross receipts tax cases to argue that physical presence never applied to non-sales and use taxes, thereby permitting imposition of tax liability based upon many states’ catchall statutory provision authorizing imposition of tax to the extent permitted by the U.S. Constitution. Therefore, for purposes of mergers and acquisitions, a harder look must be taken at states’ income, gross receipts, and even excise tax approaches and whether a state may attempt to impose liability on the seller.
While the decision of Wayfair may at first glance have seemed limited in its scope, it is broad in its potential application. It is imperative that buyers and sellers fully consider the potential impact of the decision, particularly during due diligence, to ensure all potential liabilities are thoroughly assessed and addressed before closing.
About Jennifer Weidler Karpchuk
Jennifer Weidler Karpchuk is a senior counsel at Chamberlain Hrdlicka (Philadelphia). She focuses her practice on state and local tax compliance and litigation. She represents clients in a range of taxation matters, with an emphasis on the minimization of state and local tax obligations.