Private equity groups should be apprised of potential risks given recent changes in the state indirect tax landscape regarding nexus for software companies, as well as forthcoming worldwide and country-specific initiatives by governments to shift tax regimens.
How middle-market companies can navigate these state tax changes.
Companies need to be vigilant and proactive on the indirect tax front. With recent law changes including the U.S. Supreme Court’s decision in the Wayfair case, it is now easier than ever for state and local taxing jurisdictions to impose taxes on entities and transactions that were previously untaxable. As a result, these state and local jurisdictions are aggressively asserting that taxes are owed on new products and services under existing taxing authority. Software and SaaS providers are a prime example of the types of companies that are targets of these tax impositions. Moreover, state and local legislative bodies are enacting new laws that extend their taxing reach even further, allowing them to assess taxes on previously untaxed entities and products, such as digital goods and their equivalents. This fruitful trend is unlikely to change in the immediate future. These jurisdictions are unsurprisingly eager to collect all the taxes they can, and these shifts present them with a “target-rich” environment.
As a result of these changes, the focus should move from the initial question of if private equity investees will be subject to these taxes, to the assumption that they are. At that point, the issue becomes “getting it right” on the front end. For example, investors should be asking if the correct amount of tax has been paid by the appropriate taxpayer, to the correct jurisdiction. With the new-found ability to assert existing taxes, enactment of new taxes, and the evolution of more complex business structures, these questions don’t get any easier, and they aren’t going away. Here are a few questions companies and investors should ask themselves and their potential portfolio companies:
Three Questions Investor's Should Ask About State Taxes
- What are your companies selling and are they subject to tax? Different jurisdictions have different rules. What is taxable in one jurisdiction may not be taxable in another.
- Where are your companies engaged in business? Does this activity create a tax collection obligation and filing requirements? Jurisdictions have different filing requirements and thresholds.
- If a company is subject to tax in a certain jurisdiction on a particular item, are there any exemptions that may apply? If so, have they been properly documented and secured? Has the tax been paid to the appropriate jurisdiction? Transactions often have multiple “touches” with services and parties often being located or occurring in two, three or even more jurisdictions. If you have to pay tax, make sure you are paying it in the right places.
By knowing these taxes are out there and are being asserted more broadly and aggressively than ever before, you can minimize the tax uncertainty and disruption inherent in any new acquisition or structure. Stay close to your tax advisors on any new deal or acquisition. It is far better for them to alert you to the existence of these taxes so that you know what you are walking into from the beginning and take steps to eliminate or reduce any unpleasant tax surprises that might befall the unprepared. Please contact the LBMC SALT Group or your LBMC Tax Advisor if you have questions or need assistance. Jay Hancock is LBMC’s State and Local Tax Practice Leader. He can be reached at firstname.lastname@example.org.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.