Top State and Local Tax Issues. in M&A Transactions

Transcription

1 Top State and Local Tax Issues in M&A Transactions Presented by Nathan J. Hagerman, Taft Stettinius & Hollister LLP 1 Top State & Local Tax Issues in M&A Transactions Role of the state tax advisor in M&A. Common and overlooked state tax issues when buying and selling businesses. Focus on multi-jurisdictional and multi-entity deals. Components of a transaction from deal structure to closing for the state tax M&A specialist. 2 1

2 Key Issues Covered Today Common deal structure aspects of stock and asset purchases. State tax considerations with respect to popular federal income tax-free tax strategies and a discussion of how state tax results can differ from federal tax consequences. Due diligence strategies for mitigating state tax risks of the existing business operations and uncovering potential issues. General state tax considerations for sole proprietorships, pass-through entities and corporations. Understanding transfer tax hazards, including real estate and other documentary, stamp, registration, and other similar transfer taxes. 3 Key Issues Covered Today Important state income tax considerations. Important sales and use tax issues, including isolated, occasional or casual sales tax provisions. Planning around successor liability, including tax clearance, bulk sale notification procedures, and owner/officer liability. Drafting and negotiating key state tax provisions of the deal, including terms and conditions, reps and warranties, covenants, indemnity, and escrow. Final cautions for cross-state or other multi-jurisdiction deals. 4 2

3 The Tax Advisor in the M&A Lifecycle M&A Strategy Target Screening Due Diligence Transaction Execution Integration Develop plan for overall business portfolio Long term M&A goals Develop screening criteria; requisites for strategy Evaluate targets Identify acquisition candidates Detailed screening of potential targets on the basis of business strategy, competitive strategy and value potential Identify deal valuation and structure alternatives Conduct tax due diligence Identify liabilities, commitments, contingencies and exposures Complete structure and funding planning Identify and report Federal, state, local, foreign, property, and transfer tax exposures and optimize benefits Begin integration planning Prepare private letter ruling or opinions supporting key tax features of transaction Draft or review tax allocations, reps, warranties, covenants, and indemnifications Support transaction closing procedures Plan post transaction profile and needed structuring Establish tax integration strategy Validate and refine tax synergy estimates Develop Day One requirements and End State plans Provide continued support on tax structure, filings, and compliance Gather and determine PPA and opening tax balance sheet Manage transfer taxes Execute and manage to integration plans Immediately execute on tax saving opportunities Complete legal entity structure implementation Organizational design and implementation including change management Transaction service agreement exit strategy 5 Knowing the Essentials of the Deal Buyer versus Seller Financial buyer (Private Equity) or Strategic? Asset or Stock/Equity? Statutory Combination? Special considerations What s driving the deal? 6 3

4 Transfer Taxes Sales & Use Tax Income Tax Franchise Tax Gross Receipts Tax Real Property Tax Potential State Tax Risks Capital stock Occupational license Business privilege LLC fees City and County Taxes Documentary Stamp Taxes Business Personal Property Recording Taxes Tax Excise Taxes Employment Taxes Severance Taxes Net worth Unique Taxes 7 General Considerations for State Tax What kind of business is involved? Services, manufacturing, retail? Specialized or regulated industry? How is the target currently taxed for federal? What tax jurisdictions does the entity do business? Where are employees, assets, and customers? 8 4

5 Due Diligence Strategies for Mitigating State Tax Risks of the Existing Business Operations and Uncovering Potential Issues IMPORTANT DOCUMENTS: Draft Agreement & Relevant Financial / Tax Schedules Current Ownership of Target Income Statement and Balance Sheet Current Management Company Organization Chart Historical State Tax Returns Income/Franchise Property Tax Sales Tax 9 Due Diligence Strategies for Mitigating State Tax Risks of the Existing Business Operations and Uncovering Potential Issues IMPORTANT DOCUMENTS: Apportionment Schedules Litigation, Audit Notices, Audit Findings, Appeals, Settlements, Refund Claims Legal Agreements Company Brochures, Customer and Vendor Contracts, Offering memos, Legal Agreements Company Website Annual Report & Audited Financial Statements Provision Workpapers, Reserves, Uncertain Tax Positions 10 5

6 Due Diligence Strategies for Mitigating State Tax Risks of the Existing Business Operations and Uncovering Potential Issues Specialized Industry Considerations o Aviation o Biomedical o Broadcast o Construction o Employee Leasing o Franchising o Gaming o Healthcare o Insurance o Internet o Manufacturing o Mining o Oil & Gas o Real Estate o Regulated Financial o Retail o Services o Software o Transportation o Utilities 11 Drafting & Negotiating Key Provisions of the Deal for State Tax Terms & Conditions: Working Capital Adjustments. Tax Allocations, Pre-, Post-, and Straddle Periods. Closing Books. Excluded Assets, Included Assets. Retained Liabilities, Assumed Liabilities, Excluded Liabilities. Filing & Payment Responsibilities, Cooperation Clauses. Prepaid Tax Credits. Refunds, Audits, Tax Benefits, NOLs. 12 6

7 Drafting & Negotiating Key Provisions of the Deal for State Tax Representations & Warranties Identifying, Quantifying and Shifting Risk Negotiate Exclusions, Limits, Qualifiers, & Exceptions Pre- & Post- Closing Tax Deliverables 13 Drafting & Negotiating Key Provisions of the Deal for State Tax Covenants Indemnity & Contingencies Breach & Remedies Baskets & Caps Deductibles General / Line Item Escrow / Withholding 14 7

8 Common Deal Structure Aspects Purchase Price Allocation Leverage / Debt / Financing Intercompany Debt Intercompany Interest 15 State Tax Considerations for Federal Income Tax Prevailing Tax-free Strategies Federal / State Filing Methods Tax Free Spinoff / Reorg IRC 355; 368 Stock Purchase Treated as Asset Sale? Insolvent Entities / Capitalization Issues Entity level taxes on federally disregarded entities 16 8

9 State Tax Considerations for Federal Income Tax Prevailing Tax-free Strategies For each state and locality involved, determine: Conformity: Federal Consolidated Rules State Filing Methods o Consolidated* (generally same as federal group) o Separate o Nexus combined o Water s Edge or Worldwide combinations o Pre- or post- apportionment combinations Non-income state corporate taxes 17 State Tax Considerations for Federal Income Tax Prevailing Tax-free Strategies State and locality conformity to Federal IRC: Conformity Options o Rolling Updates o Fixed Date o Conformity by Reference o No statutory conformity Conformity Carve Outs o Transfer of NOLs o 108(i) o 368;

10 State Tax Considerations for Federal Income Tax Prevailing Tax-free Strategies State Income Tax Considerations involving Transaction Gain Federal/state basis differences Long term capital gain Sale of Equity / Assets o Real estate o Entire business or exiting market o Rental income o Intangible property 1031 Exchange 19 State Tax Considerations for Federal Income Tax Prevailing Tax-free Strategies State Apportionment Sourcing Gain Business versus Nonbusiness income treatment Running the numbers o Factor dilution o Income / loss netting o Special apportionment (retail, manufacturing, utilities, FIT) Instant unity Elections New nexus 20 10

11 State Tax Considerations for Federal Income Tax Prevailing Tax-free Strategies State conformity to 338(H)(10) election Federal consolidated returns & separate state returns 311(B) gain deferral Federal credits with basis adjustments Federal / State NOL differences 21 State Tax Considerations for Federal Income Tax Prevailing Tax-free Strategies State Nexus Income tax PL Sales tax Non-income business taxes: franchise, gross receipts, net worth, capital stock, occupational license, business privilege, LLC fees 22 11

12 Due Diligence Strategies for Mitigating State Tax Risks of the Existing Business Operations and Uncovering Potential Issues Special Considerations Where are customers? Real property? Leased assets? o Capital / Operating o Fuel Surcharges o State and Federal Excise Taxes o Lease with Operators / Heavy Equipment / Barges Service v. Rental o Aircraft Leases Wet / Dry 23 Due Diligence Strategies for Mitigating State Tax Risks of the Existing Business Operations and Uncovering Potential Issues Special Considerations Withholding provisions Earn Outs Depreciation Sales Tax Planning 24 12

13 Understanding Transfer Tax Hazards Transfer Taxes Personal Property Tax Real Estate Documentary Stamp Registration Bulk Sale Fraudulent Transfer 25 Important Sales and Use Tax Details Sales Tax Isolated, Occasional or Casual Sales Tax Provisions Exemptions Exemption Certificates Tax Clearance Bulk Sales Notifications Owner/Officer Liability 26 13

14 Unclaimed Property Unclaimed Property / Escheats Accounts Payable / Accounts Receivable Gift Cards P Cards 27 Coordination among: Final Cautions for Cross-State and Multi-Jurisdictional Deals Federal and international tax advisors Business/corporate deal legal team Other outside advisers Interested parties Buy-in from financing 28 14

15 Final Cautions for Cross-State and Multi-Jurisdictional Deals Use local state & local tax experts! Some jurisdictions have strict local practice rules State tax law is underdeveloped compared with federal Constantly changing Too many jurisdictions for one person to keep up with them all Published law and guidance does not always match practice 29 Questions? Nathan J. Hagerman / Partner Taft Stettinius & Hollister LLP One Indiana Square, Suite 3500 Indianapolis, IN nhagerman@taftlaw.com / (317)