Sales Tax Insurance: A New Tool for M&A Negotiations
In the wake of the 2018 South Dakota v. Wayfair decision, companies involved in M&A transactions are finding that while traditional R&W insurance won't cover known sales tax compliance issues, specialized tax insurance can offer a practical alternative to expensive escrow arrangements.
TAX
2/16/20252 min read
Let's talk about a major shift in sales tax collection that's been causing quite a stir in the business world, especially when it comes to mergers and acquisitions (M&A).
Back in 2018, the Supreme Court made a game-changing decision in South Dakota v. Wayfair. This ruling basically said that states could require out-of-state sellers to collect and pay sales tax on sales made into their state. As you can imagine, this has created quite a headache for companies selling across multiple states, as they now need to keep track of different sales tax requirements everywhere they do business.
This has become particularly tricky during company acquisitions. Here's what typically happens: During the due diligence process (think of it as a really thorough background check), buyers often discover that sellers haven't been properly collecting or paying sales tax in various states. Even if the seller thought they were doing everything right, these issues can cause serious complications.
The real challenge comes up when trying to figure out who's responsible for these potential tax liabilities. Traditional representations and warranties (R&W) insurance typically won't cover these "known issues." This often leads to some tough negotiations between buyers and sellers.
Buyers usually want to protect themselves by either having the seller set aside money in escrow or by pursuing voluntary disclosure with the states where they've found problems. As you might expect, sellers aren't too thrilled about having large chunks of their sales proceeds held back for what might be worst-case scenarios.
But here's the good news – there's a potential solution. While R&W insurance might not help, sellers can sometimes get specific tax insurance for uncertain tax issues. This can be particularly useful when buyers and sellers disagree about whether certain transactions should be taxable. If the seller has solid backing from their tax advisors, they might be able to get insurance coverage for a relatively small percentage of the potential liability.
The takeaway? While traditional R&W insurance probably won't help with known sales tax issues, tax insurance could be a smart alternative to avoid tying up large amounts of money in escrow during M&A deals.