ExpF_SALT-MA_Wpres_FINAL_030613

•
•Proceed With Caution:
•State and Local Tax Issues
•Affecting Mergers & Acquisitions
•George Kyroudis – Director, M&A Taxes
•Myron Vansickel – National Tax Director

M&A: State Tax Opportunities
•General Information
 Share the webinar
 Ask a question
 Votes (polling questions)
 Rate (before you leave)
 Attachments (you can download today’s materials)
•Experis | Tuesday, March 05, 2013 2

•Earning CPE Credit
 To receive 1.0 CPE credit for this Webinar, participants must:
• – Attend the Webinar for at least 50 minutes on individual computers (one person per
computer)
•– Answer polling questions asked throughout the Webinar

•Meet Our Presenters
George Kyroudis
Director, Tax Practice
Myron Vansickel
National Director, Tax Practice

•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 state-and-
•local-tax 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?

•M&A: State Tax Opportunities
•Overview: Which state can tax the transaction?
 Does a person have sufficient
•Nexu
s
•tax in that jurisdiction
•contacts to be responsible for
 Commerce Clause and
•Due Process Limitations
 To what extent can a state tax •the
•Apportionment
•and Allocation
 Business Income vs. Non-Business Income
 UDIPTA
 Caselaw
•income and assets

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

•Polling Question #1
•How many acquisitions or dispositions does your company
•execute a year on average?
A. None
B. More than 2
C. More that 5
D. None at this time, but currently evaluating options

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

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

•Tax Risk – Identification Continued
•Read significant
•Previous Purchase
•agreements
•Transfer pricing
•Debt
•Agreements
•Employment
Agreements
•Agreements
•agreements
•Indirect Taxes
•Gross Receipts Tax
•Employment Taxes
•Business Licenses
•Real & Personal
•Sales Use Tax
•Consider
•PropertyTax
•OtherTaxes
•Considerations
•Records Retention
•Workforce Issues
•IntangibleAssets
•TaxManual
•& Procedures
•Tax Calendar
•Other
•Mobile

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

•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

•Due Diligence is:
A. One of the most important processes when conducting a transaction
B. Least important part of the transaction process
C. None of the above

•Structure of the Deal
•Transaction Structure –
•Fundamentally two forms of business acquisitions
 Asset Purchase – An 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 New York 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 New York 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? Continued
 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

•What taxes should be reviewed during the
•due diligence process?
A. Federal income taxes only
B. Unclaimed property compliance and distribution to the States
C. All applicable taxes that may impact the transactions and
•the business of the target

•
•
•Summary: Transaction Process and
•State and Local Tax Consideration
•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
•Transaction Itself
 Avoid Successor
Liability, transaction
taxes, qualify for tax
exemptions & obtain
tax clearance
•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
 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

•For more information
•George Kyroudis
•Director, Midwest Tax Practice Leader
•george.kyroudis@experis.com
•(312) 730-1824
•Myron Vansickel
•Director, National Tax Director, Strategic Tax Accounts
•myron.vansickel@experis.com
•(571) 382-0460

•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.

•ExperisTM Finance delivers innovative solutions
•that help companies create competitive advantage,
•custom tailoring our project solutions and professional
•resourcing services to fit our clients’ needs
•in risk advisory, tax and finance & accounting.

•For more information, please visit
•www.experis.us/finance

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