Nexus and Registration Impacts of Mergers and Acquisitions

Is your business going through a reorganization? Mergers and acquisitions change everything. The identity and purpose of a company and its products or services determine sales tax obligations differently across the states. In this article, we’ll outline the steps that every business needs to take when going through mergers and acquisitions to avoid audit risk. 

When your business becomes responsible for a new entity, the first question that you need to ask is how the target entity will be incorporated into the buyer’s original business. This must be determined to move forward in the nexus evaluation and sales tax registration process because it could play out in a variety of ways.  

      1. Will it be merged into the buyer’s existing legal entity which is common with an asset acquisition? OR… 
      2. Will it remain a separate legal entity which is more common with a stock acquisition? 

Reviewing for Nexus 

When you are dealing with an acquired entity, a nexus analysis of the target is the first step that should be taken from the sales tax perspective.  Whether the target will remain as a standalone entity or be merged into the buyer’s entity will impact the nexus evaluation. 

If the entity will remain a separate entity, it’s best to review the existing registrations with state Departments of Revenue to determine if it is registered everywhere, it should be or if there are areas of exposure:  

      1. When nexus was established 
      2. When registration occurred 
      3. How the company registered (what type of registration) 
      4. Where existing sales tax compliance is current  
      5. And if any prior periods were resolved through an audit or voluntary disclosure agreement 

If the entity will be merged into the buyer’s legal entity, it’s time to determine if any changes are needed to your registration based on the target’s nexus profile. The first step is to compare company and employee locations, inventory (including consigned) locations, tangible personal property, and real property locations to sales tax registrations. Does the acquisition change anything for your existing company or will your existing physical footprint impact the new acquisition? Then thoroughly investigate the sales tax data for a determined period to evaluate transaction counts and sales dollars by state compared to economic nexus thresholds.  If there are states where nexus had not been established, the combination of the two entities could change the nexus profile. For help with determining economic nexus thresholds, check out our Economic Nexus State by State Chart.  

If the target will remain a separate legal entity, identify your related entities to check for any affiliate nexus issues. Affiliate nexus typically requires that a remote retailer holds a substantial interest in, or is owned by, an in-state retailer and the retailer sells the same or a substantially similar line of products under the same or a similar business name, or they have in-state facilities/employees used to advertise, promote, or facilitate sales to an in-state consumer. This may include activities in the state on behalf of the out-of-state business to benefit the out-of-state business’ customers. 

Here are some final elements to consider. Determine how products are delivered to customers and through which selling channels. Then, determine what services are performed and where. Finally, consider the impact the nexus date will have on the existing buyer company upon transition if merged. Overall, the more information you have about the business and exactly what it does, the better. Knowledge is power! 

Nexus evaluation related to acquisition activity can be tricky – not only do you need to evaluate and know each party’s nexus profile but then you have to look at it combined. And you can’t just determine nexus but also the type of nexus. A combination of companies could result in remote seller nexus changing to physical nexus. This could change the registration type and filing frequencies.


Registering New Entities 

Once you know the structure of the acquisition and where nexus is established, the next step is to determine what changes if any might be required to the sales tax registrations. When a business reorganization changes the structure of the business, a new registration is generally required. For example, this could be a switch from a partnership to a corporation or from an out of state vendor to an in-state vendor. On the other hand, if there is a new legal entity created, this new business should register as a sales and use tax vendor with the effective date of the registration the same as the acquisition date of the target company. When you’re in the process of registering, be clear on registrations required for Secretary of State filings versus those for sales tax Department of Revenue.  

Regardless of whether a new registration is required or just updates to the existing one, registration changes must be coordinated with other stakeholders. Collaboration with departments such as payroll is vital to ensure there is no duplication when registering for sales tax. Also check with the seller to review if there is a need to close the seller’s registration and file final returns. If the target entity is being dissolved, the closeout or deregistration process can be a heavy lift as each jurisdiction requires different information.

De-Registering Entities 

De-registration of the dissolved or merged entity for sales tax is completely different in every state (typical sales tax problem!) and may seem less complicated than before you begin the process. Some states make it difficult to verify that a company was successfully de-registered. The de-registration process can be a daunting task! So, let’s dive in a bit more to clear things up… 

Across the states, some methods of de-registration are more common than others. Here are some examples: 

      1. Marking a return as final (This is what everyone thinks de-registration is, but it’s not actually common!) 
      2. Using an option in the online tax filing portal (Usually your easiest option!) 
      3. Filling out a separate form that can be submitted online 
      4. Emailing the state 
      5. Faxing the state 
      6. Mailing a de-registration application or letter to the state 

The details of deregistration can be tricky, so we have a few tips for you. First, there can be issues with the gap of time between when the business stopped collecting sales tax and when they are marked as de-registered by the state (what we call delinquent returns). All of these returns must be filed – even though they are $0 returns.  A state can’t close a registration with outstanding periods. Be sure to keep filing these returns until the account is closed. Second, deregistration may require or enable you to cancel other filing types and licenses in the state. If the seller had been registered with the Secretary of State or filing income tax returns, these accounts also can be closed down.  If a registered agent was engaged, this could also be cancelled. Keep in mind with income tax returns, since these are annual rather than monthly, a “stub” (short) period return would be required. 

We know that mergers and acquisitions can lead to a huge scramble across every department of each entity involved. Those responsible for sales tax are no exception! Taking the initiative to learn what you need to determine nexus and get registered (or de-registered!) successfully as the changes in your business take place will lead to a smooth transition. 

Posted on July 17, 2023