Originally published on HLB Insights
The Wayfair decision has had an impact on M&A deals for sellers and acquirers globally. Previously, online sellers had an advantage in any U.S. state that did not require them to collect sales tax unless the seller had a physical presence in the state. The Wayfair Supreme Court decision changed that by allowing states to impose tax on sellers without a physical presence in the state.
Wayfair stems from a South Dakota law that required an out-of-state seller to collect and remit sales tax when that seller delivered more than $100,000 of goods or services or engaged in 200 or more separate transactions annually in the state. The law was challenged in the courts, and ultimately, the U.S. Supreme Court case Wayfair v. South Dakota, No. 17-494 (2018), removed the requirement for sellers to have a physical presence.
For companies that sell online, the biggest issue from a global standpoint is that foreign companies selling into the U.S. either online or through other distribution channels may not understand the U.S. sales tax rules, which are made more complicated by Wayfair.
Impact of court decision
The old rules were clear — sellers that had a physical presence and were selling taxable items would have state and local sales tax responsibility. Under Wayfair, states may impose a sales tax collection requirement on companies that meet the threshold, which may be different than South Dakota’s $100,000 in sales or 200 transactions. While South Dakota is a smaller state in terms of sales and total population, other larger states are considering raising the thresholds. It is important for non-U.S. companies to understand any state’s threshold that applies to them and proactively figure its tax liabilities.
Impact on foreign M&A transactions
For any M&A transaction, there will now be additional scrutiny on whether sales tax has been properly collected in any state. For example, a U.S. buyer needs to know if their foreign target is selling into the U.S., whether the product is shipped from abroad or from the U.S. and whether they have exceeded the threshold in any U.S. state. The good news is that Wayfair will not be retroactive, and sales tax should be considered from each state’s adopted date of imposing a Wayfair type threshold which in most states is only from 2018 onward. Since there is not a blanket rule for all states and there will be different thresholds, it can be more complicated for accountants and other transaction advisors.
How to limit your liability
In a potential M&A deal, any seller that could be affected by U.S. sales taxes needs to assess and fix any liability from 2018 forward. They should prepare their own analysis and be transparent about any exposure that exists. In cases with major liability, there may be ways to structure the transaction in a more advantageous way — for example, the buyer could segregate a part of the company into a new legal entity that avoids the liability. If there is any doubt about potential exposure, a U.S. tax expert should be brought in to identify and correctly position the company for the optimal tax effect. As part of a deal, the acquirer must also consider how they will handle compliance going forward. This can mean hiring additional compliance people in-house or contracting an outside advisor.