With the pace of merger and acquisition activity taking place in the healthcare industry, tax due diligence—which involves a thorough analysis of the different types of tax liabilities that may exist when a company is purchased or sold—often gets overlooked in asset sale transactions.
Why would this be the case when millions of dollars may be at stake? In most cases, the buyers believe that because they are purchasing assets instead of a company’s stock/equity, they are shielded from any potential pre-acquisition liabilities. That can be a risky and potentially costly assumption.
While it is true that buyers can avoid some types of tax exposure with an asset purchase, there are two liabilities they generally cannot escape: sales tax and payroll tax. In many taxing jurisdictions, any liability associated with sales or payroll tax attaches to the assets of the entity and, in most situations, the buyer can become responsible for paying the liability. These areas of exposure are commonly overlooked during the due diligence process, yet both can negatively affect the outcome of the transaction and the buyer’s bottom line post-acquisition.
In some cases, there also may be substantial penalties added to the tax liabilities, making what appeared to be a great deal much less appealing.
The following is an overview of a few potential areas of sales and payroll tax exposure that can exist at the time of acquisition.