Most of the time, state and local tax is not at the forefront when a business owner or management team puts a company up for sale. In Part One of this article from July 2015, we focused specifically on addressing sales and use tax issues because these typically draw the most attention when selling or buying a company. In this article, we will address the remaining state and local tax types, including employment tax, property tax, unclaimed property, and state income/franchise tax, and the impact they have on selling or purchasing a business.
When we talk about withholding tax, we are referring to the employment taxes that are collected and remitted to the various taxing jurisdictions throughout the year. The biggest issue to address is whether you are correctly registered to collect and remit withholding taxes in the states in which you have employees who perform services on your behalf.
When it comes to state and local employment tax issues, the following items are often addressed:
- Is the company properly reporting employees in the correct tax jurisdictions for withholding tax purposes?
- Are all payments remitted on a timely basis?
- Is the company properly reporting employees in the correct tax jurisdictions for unemployment tax purposes?
- Has the company gone through any recent audits? If so, what were the results of the audit, and have the necessary changes from the audit been put into place?
- Is successor status mandatory or elective in each state with respect to the experience rating an employer uses for unemployment tax reporting purposes?
When we talk about property taxes, we generally refer to two tax types, real and personal property. Not all states have real estate or personal property tax filing requirements. Some have one but not the other. When it comes to state and local property tax issues, the following items are often addressed:
- Is the business filing the necessary reports in the taxing jurisdictions that require the filing of real and personal property tax returns?
- Have all reports and payments been filed in a timely manner, and have assessments been paid?
- Has the company challenged the state or local assessor with respect to valuation of the real or personal property amounts assessed over the last three to four years? If yes, what was the final outcome of the challenge(s)?
- Did the company go through an audit recently? If so, what were the results of the audit?
- Do any reporting requirements exist at the local or state level for the transfer of business property from the seller to the purchaser?
Are you complying with unclaimed property reporting requirements? Every business holding unclaimed property is required to file an annual report and remit unclaimed funds to the state. Dealing with multiple states is always difficult, and unclaimed property is no exception. All states have their own set of unclaimed property laws. As a result, definitions and reporting requirements vary by state. Bottom line, the cost of noncompliance is steep, and the risk of audit is dramatically increasing. As more states view unclaimed property as a revenue source, they have become more aggressive in pursuing unclaimed property and placing businesses not in compliance under audit. The key things to consider:
- Do you have procedures in place to detect and identify unclaimed property?
- Are you currently filing unclaimed property reports?
- Has the company gone through an audit recently?If so, what were the results of the audit?
State Income/Franchise Tax
When we talk about state income/franchise tax (or gross receipts taxes), we are referring to the taxes imposed at the company level. In the event you sell the stock of the company, one of the steps the buyer might take is to determine whether your company has correctly filed state income/franchise tax returns in the necessary taxing jurisdictions. Included in this review would be any states where the company does business that have a gross receipts filing requirement as well (i.e., Washington’s business and occupation tax). To the extent the company has a requirement to file tax returns in a state and was not filing, those liabilities remain indefinitely. Potential buyers may also evaluate potential liability to the company for its failure to withhold tax on behalf of its shareholders in other states. More states have imposed withholding requirements at the pass-through entity level to ensure that the tax liabilities of the shareholders are met.
Purchasing a Business
The same concepts and ideas that were discussed above for a company in the process of selling its business can also be used for someone who is purchasing a business. State and local tax issues can be a complex issue when selling or purchasing a business. Even if you are not thinking about selling your company, the suggestions above can provide a quick touch point to determine whether you are in compliance with your state and local tax filings. Wipfli has the expert resources to help you deal with state and local tax issues when selling or buying a business. If you have questions about the procedures your business may or may not currently have in place from a state and local tax perspective, Wipfli LLP can help.