M&A State Tax Issues

Proceed With Caution:
State and Local Tax Issues
Affecting Mergers & Acquisitions
• George Kyroudis – Midwest Tax Practice Leader
• Myron Vansickel – National Tax Director

Experis | Tuesday, August 9, 2022 2
M&A: State Tax Opportunities
Panelists – With you Today
George Kyroudis, Director
Midwest Tax Practice Leader
(312) 730-1824
Myron Vansickel, Director
National Tax Director, Strategic Tax Accounts
(571) 382-0460

AGENDA
Overview – State Taxation Considerations
Tax Risk – How to identify exposure and mitigate
Due Diligence – Considerations before the deal
Transaction – Structuring an acquisition
Post Integration – What is the impact

Why?
• State income tax laws federal Internal Revenue Code (IRC)
– most state income taxes are based on the federal Internal Revenue Code
– some only adopt portions of the IRC
– or adopt an older version of the IRC
• State and local income taxes, sales taxes, gross receipts taxes and
other taxes do not follow federal income tax rules
• Tax-free federal transaction does not mean tax-free in the SALT world.
• State tax costs, risks, or issues are not immaterial.
• Considering possible state and local tax ramifications early in the
process is critical to avoiding hidden tax costs that cause companies
significant actual tax expense and the cost of resources required to try
to correct problems post-deal.

Overview of Transaction Corporate Tax Issues
In which states are the parties
taxable?
How do those states
characterize the transaction ?
How do the states compute
taxable income?

Overview: Which State Can Tax the Transaction
• Does a person have sufficient contacts
to be responsible for tax in that
jurisdiction.
• Commerce Clause and Due Process
Limitations.
Nexus
• To what extent can a state tax the
income and assets.
• Business Income vs. Non-Business
Income
• UDIPTA
• Case Law
Apportionment
and Allocation

Overview: How does the state characterize the
transaction?
• In General state tax laws of the transaction follows the Federal
definitions.
• Is it really a “stock” acquisition? Acquisition of an interest in a flow-
through entity is not an asset deal, for all tax purposes.
• State tax treatment of LLCs, partnerships and S corps
– Some states impose an entity-level income tax.
• Liable for income tax of non-resident partners
– Most states adopt non-resident income tax withholding requirements on
LLCs, partnerships and S corps.
• IRC §338(h)(10) election
– Each state may not have conformity with the federal election.
– Consider state consequences of a stock sale versus an asset sale.

Overview: How do states compute the amount of
tax due?
Subsidiary Stock Basis Differences
State non-conformity to Treas. Reg. 1.1502-32 & 1.1502-36.
Allocation of purchase price among different assets
Different taxable results in different states as a result of the purchase price allocation
Asset Basis Differences – State Depreciation
Decoupled from accelerated depreciation or cost
recovery under ACRS and MACRS
Impact of Bonus Depreciation on Gains/Losses
Federal and State Conformity with certain caveats, for example:

Tax Risk Identification
Retained Liability
Stock acquisitions
Remain with the target and are
assumed by the buyer upon
acquisition
Successor Liability
Asset acquisitions
Exposures generally not
transferred:
Income/franchise taxes (net
worth and capital-based tax)
Exposures generally transferred:
Sales and use taxes, Gross receipts taxes,
State unemployment tax - successor
employer, Property tax - lien date-driven

Tax Risk – Identification
Understand
Target
Operations
Revenue streams
Intercompany
Transactions
Tax Footprint (nexus)
Sales factor
sourcing
Learn about
Target
Read the financial
statements e.g. effective
tax rate, FIN 48
reserves, Footnotes
Public Regulatory
Documents e.g. 10K
Corporate
organizational chart
Review tax
returns
Consolidated Group
and separate
company returns
Tax Attributes
Schedules e.g. NOL
IRS and State Tax
Audits

Tax Risk – Identification (Continued)
Read
significant
agreements
Transfer pricing
agreements
Debt Agreements
Employment
Agreements
Previous Purchase
Agreements
Consider
Indirect Taxes
Sales Use Tax
Real & Personal Property
Tax
Business Licenses
Gross Receipts Tax
Employment Taxes
Other Taxes
Other
Considerations
Tax Calendar
Intangible Assets
Mobile Workforce
Issues
Records Retention
Tax Manual &
Procedures

Tax Risk Mitigation – Buyer Protection
• Could create collateral issues – could be cost
prohibitive.
Restructure Agreement
• Buyer is typically protected for an event which
requires a cash tax event.
Purchase Price
Adjustment
• Provides downside protection for a specific or
general risk for a certain period of time. Any
funds remaining revert to the seller.
Escrow Account
• Ideal in situations that risk cant be quantified or
is highly contingent on an event e.g. tax audit.
Agreement Indemnities

Due Diligence – Considerations Before the Deal
Document Requests
• The due diligence process is one of the most important elements of
any transaction, whether buyer or seller.
• Without complete and accurate information, the individual negotiating
the transaction will be unable to address potentially significant areas
of concern.
• Review all documents in data warehouse and request additional
information to resolve unanswered questions.
• Develop a checklist document based on information you have
reviewed and based on the type of transaction being considered. A
income/franchise and/or a sales/use tax nexus study may be
warranted

Due Diligence Continued
• State issues connected with a sale transaction, real, personal, sales,
use, gross receipts, franchise and employment taxes.
• Triggering of deferred intercompany transactions (“”), excess loss
accounts (“ELA”).
• Pre-transaction structuring – Distributions, Dividends
• Basis differences
• Sourcing gain and receipts in the sales factor
• Audit Results and Adjustments
• Determine if a nexus review should be performed for sales/use,
income and payroll taxes.

Structure of the Deal
• Transaction Structure – Fundamentally 2 forms of business
acquisitions
– Asset Purchase – as acquisition of all or most of the assets and liabilities
of a company or a line of business. Generally, do not inherit tax liabilities
except for sales taxes under successor liability rules
• Existing NOL/credit attributes may be lost,
• Immediate impact on nexus profile/footprint
• Step-up in tax basis
• Capital tax implications & Sec. 197 Amortization
– Stock Purchase - A business transfer where either the corporate stock or
partnerships are transferred
• Carryover of tax liabilities, tax attributes, E&P, etc.
• Short-period filings, retention of tax ID numbers

Structure of the Deal
• Sales and Use Taxes
• Will tax be due on the merger or acquisition transaction?
• Is the acquirer potentially liable for unpaid sales tax owed by the
transferor?
The sales tax treatment of a merger or acquisition generally depends on
its form. State sales and use taxes usually apply only to transfers of
tangible property, so transfers of corporate stock and securities are not
subject to sales taxes.

Allocation of Purchase Price
• Whether a stock or asset purchase, financial accounting requires the
assets to be recorded based on its fair market value.
• This will cause differences between book and tax basis. Will impact
deferred taxes.
• This may also impact the fair market value used by property tax
assessors. Plan ahead as you may increase above the line tax costs
associated with operations.
• IRC § 338(h)(10) can provide a step up in tax basis for Federal
income tax purposes. Review the State income tax treatment where
applicable.
• This step-up may increase your operating costs due to increased
property tax assessments.

Allocation of Purchase Price Continued
• Make sure that you can utilized the step-up basis and it provides
better after-tax cash flow then not utilizing it.
• What to consider when electing IRC § 338(h)(10)?
– Is the buyer in a Net Operating Loss without major limitations?
– What is the stepped-up basis for the categories of assets?
– What is managements goal, i.e., earnings per share or after-tax cash flow
maximization?
– Other business consideration including subsequent sales of assets.

Structure of the Deal – Sales/Use Tax
• A Reorganizations. Many states provide specific exemptions for
transfers pursuant to a statutory merger or consolidation.
• B Reorganizations. Stock-for-stock reorganizations should not have
any sales or use tax implications, since the property transferred is
intangible property.
• C Reorganizations. An acquisition of corporate assets for stock is a
requires carefully examination since the corporation is acquiring
tangible property, unless some exemption applicable, sales or use tax
will be due.
• D Reorganizations. Typically involve transfers of property to a
corporation, for stock in that corporation. The property transfer is
potentially subject to sales tax, however many states have exemptions
for transfers to newly-formed corporations in exchange for stock.

Structure of the Deal – Sales/Use Tax
• Recapitalizations under E. Do not trigger sales or use taxes since
recapitalizations involve transfers of intangibles.
• F Reorganizations. Transactions that are a "mere change in identity,
form or place of organization" generally are not the subject to tax.
• Triangular Mergers. The federal income tax rules provide tax-free
reorganization treatment however depending on the transaction
– forward triangular merger – typically subject to sales tax unless a specific
exemption exists.
– reverse triangular merger - no sales tax on the target's assets.

Structure of Deal – Sales/Use Tax
Different tax outcomes by two different States regarding tax-free
reorganizations subject to sales tax. Check every state where nexus
has been established.
• New York exempts the transfer of property to a corporation in a
statutory merger or consolidation, but only if the transfer is in
exchange for the acquiring corporation’s stock. N.Y. Regs. Section
526.6(d)(7).
• Maryland apparently exemption applies to transfers in exchange for
stock of the parent of the acquiring corporation as well as to transfers
in exchange for stock of the acquiring corporation itself. Md. Code
Ann. Tax-Gen. 11-209(c)(1)(i).

• The NY exemption may apply when the parent corporation can form a
new subsidiary and merge it into the target with the target surviving
the merger and the target shareholders receiving parent stock in the
transaction. Where the merger of the target into the parent’s
subsidiary which the subsidiary survives and the target corporation
receives stock of the parent is not exempt from NYS sales tax.
• Maryland takes a much broader approach. It has exemption for all
transfers of property in transactions that qualify as tax free
reorganizations under IRC § 368. (See prior slide citation for MD.)

Other considerations structuring the deal
• Surviving entities with in a Stock sale will retain its federal and state
income tax attributes.
• Review tax attributes or liabilities to determine the best structure.
• Consider increase in franchise taxes due to consolidation of capital
within one entity when restructuring. Look at retained earnings and
earnings and profits to determine if capital may be reduced by
declaring dividends to parent.
• Successor liability: Stock purchase liabilities will follow with the entity

Structure of Deal – Sales/Use Taxes
• An asset purchase: You may be able to file notification of the transfer
assets with appropriate notification of the sale with a state to eliminate
any successor liability.
• Look at bulk sales notifications to eliminate sales tax on these
transactions.
• Review unemployment rates to determine if there are any savings with
transferring experience rates from on entity to another when there has
been a transfer of all or a significant portion of a business.
Unemployment reserves may be transferred as well to maintain low
unemployment tax rates.

Post-Integration Issues – What's the Impact?
• Post Transaction Income Tax Filings
• New state tax footprint.
• Realign state filing methodology depending on the business
• Combined reporting and instant unity issues
• Application of consolidated return regulations
• Inter-company debt restructuring
– Push Down Debt (Review each states laws regarding interest expense)
– Franchise Tax
– E&P
• Legal entity simplification
• State tax attributes and financial statement impact

Post-Integration Issues – What's the Impact?
• If tax liabilities exist at time of sale where they estimated and added to
an indemnification or escrow?
• Look at both income, franchise and sales and use tax voluntary
disclosures to reduce the overall impact of correcting and reducing the
liabilities.
• Book all tax liabilities appropriately within the financials. FAS 740 and
FAS 450.
• Add new filing requirements to your existing tax calendars.
• Update tax attributes based on new entity structure for federal and
state income taxes.
• Make sure to close and reopen state registrations if necessary.

Summary: Transaction Process and state and
local tax consideration
The Due Diligence Phase
• Identify Tax exposure
(Risk)
• Manage & Mitigate Tax
Risk
• Evaluation of target tax
attributes
• Negotiation of
Representation,
Warranties and
Indemnities
• Obtain tax clearance
and voluntary disclosure
The Transaction Itself
• Understand the Deal
• Certain State and local
taxes can be triggered or
prevented depending on
how the transaction is
structured
• Steps to minimize or
avoid unnecessary tax.
• Maximum tax efficiency
• Utilize favorable tax
characteristics
• Forms of transactions
and jurisdictions
• Avoid Successor
Liability, transaction
taxes, qualify for tax
exemptions & obtain tax
clearance
The Integration
• Tax efficiency
• Combined Tax Footprint
Changes
• Not Combined
opportunities to file and
realize tax efficiencies
• Compliance
Requirements
• Implementing successful
organizational structure.
• Choice of Legal Entities
• Placement within
structure
• Tax-efficient financing
options

Wrap-up
Questions?

Circular 230 Disclaimer
This presentation contains general educational information only and
Experis is not, by means of this presentation, rendering accounting,
business, financial, investment, legal, tax, or other professional advice
or services. This presentation is not a substitute for such professional
advice or services, nor should it be used as a basis for any decision or
action that may affect your business. Before making any decision or
taking any action that may affect your business, you should consult a
qualified professional advisor. Experis shall not be responsible for any
loss sustained by any person who relies on this presentation. This
document was not intended or written to be used, and it cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.

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