SALT implications of M&As: Due diligence and risk mitigation

Tax professionals supporting mergers and acquisitions (M&As) often focus first on federal income tax treatment. Yet, increasingly, state and local tax (SALT) issues are a primary driver of deal risk and structure. A target’s SALT profile — spanning nexus, filing posture, indirect taxes, and exposure to audit — can dramatically impact purchase price, integration planning, and post-closing indemnification.

As states broaden enforcement efforts and modernize tax statutes in response to digital business models and Wayfair-era nexus standards, acquiring entities are more likely than ever to inherit historical liabilities that were neither expected nor disclosed. This article presents a practical framework for integrating SALT into the M&A process, with references to legal authority and real-world applications.

NEXUS IN A POST-WAYFAIR WORLD

In South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), the U.S. Supreme Court overturned the physical-presence rule and allowed states to require out-of-state sellers to collect sales tax based on economic presence. Since then, every state with a sales tax has enacted similar thresholds. While Wayfair applied specifically to sales tax, its logic has influenced broader state assertions of nexus, including for income/franchise taxes (see, e.g., Massachusetts Dept. of Revenue Directive 21-1 (describing regulations extending principles of economic nexus to income taxes on nonresidents’ wage income from within the state)).

As a result, many companies with remote employees, e-commerce platforms, or customers in other states have unknowingly created tax obligations. In the context of an M&A transaction, failing to assess nexus under both historical and current rules can lead to the assumption of undisclosed liabilities.

Example: A software company headquartered in Illinois with customers in 32 states may have crossed $500,000 sales thresholds in states such as Texas (see 34 Tex. Admin. Code §3.286(b)(2)(B)(i)) — triggering sales tax and franchise tax filing obligations even in the absence of physical operations.

INCOME AND FRANCHISE TAX EXPOSURE

Income tax exposure in an M&A deal can result from unfiled returns, improper apportionment, or misunderstanding of state-specific rules. This is especially true in combined-reporting states, where a target company may not realize its operations should have been included in a unitary return (Cal. Rev. & Tax. Code §25101 N.Y. Comp. Codes R. & Regs. tit. 20, §6-2.3 (unitary business concept)).

Even where returns are filed, a buyer must evaluate:

• Nexus history pre- and post-Wayfair;
• Whether the target relied on Public Law 86-272 for protection from state income tax (the Interstate Income Act of 1959, P.L. 86-272; 15 U.S.C. §§381-84); see Multistate Tax Commission, Statement of Information Concerning Practices of the Multistate Tax Commission and Supporting States Under Public Law 86–272 (revised 2021)); and
• Exposure from related-party transactions, royalty addbacks, and nonconformity to federal provisions such as IRC Sec. 163(j) or 174.

It is also essential to analyze the availability and continuity of net operating losses, which may be limited under federal Sec. 382 rules and further curtailed under state-specific provisions (IRC Sec. 382; Cal. Rev. & Tax. Code §24416.20).

SALES AND USE TAX PITFALLS

Sales tax remains one of the most frequent sources of material SALT exposure uncovered during due diligence. Targets often overlook taxability changes for digital goods, mixed transactions, or drop shipments. Moreover, failure to maintain valid exemption certificates, especially in multistate sales environments, is a frequent issue.

In an asset acquisition, states such as California and Florida may impose successor liability under bulk-transfer rules or sales tax statutes — even where a deal is structured to avoid an assumption of liabilities (Fla. Laws ch. 213.758(g)(4) and Cal. Rev. & Tax. Code §6811 (successor liability for sales tax)).

Sales tax exposure is often cumulative, meaning that a relatively small monthly misclassification (e.g., failure to tax a subscription-based product in a state such as Connecticut) can balloon over several years with penalties and interest.

STRUCTURAL IMPACTS AND CONFORMITY GAPS

The form of the transaction — whether structured as a stock purchase, asset sale, or IRC Sec. 338(h)(10) or 336(e) election — has different implications under SALT rules.

While a federal Sec. 338(h)(10) election treats a stock deal as a deemed asset sale for tax purposes and is thus an attractive option for buyers, the parties must be aware of potential traps. For instance, if the parent seller and the target company file separate state returns, no mechanism exists for including the target’s gain on the deemed sale of its assets on the parent’s tax return. Therefore, the tax on the gain is a liability of the target, and the economic burden of the tax will be borne by the buyer.

Furthermore, states differ in their treatment of inside-basis step-ups, depreciation recapture, apportionment inclusion, and gain sourcing. Buyers must review conformity on a jurisdiction-by-jurisdiction basis to properly model after-tax impacts.

INDIRECT TAXES AND INDUSTRY CONSIDERATIONS

Industry-specific and indirect taxes, including gross-receipts taxes (e.g., the Washington business and occupation tax and the Ohio commercial activity tax), utility excise taxes, real estate transfer taxes, and local license fees, can create surprising exposures. These are especially common in regulated industries such as:

• Telecommunications (subject to utility and 911 fees);
• Construction (contractor use tax and mixed-use property rules);
• Energy (severance and fuel taxes); and
• Health care (provider and facility fees).

For software-as-a-service (SaaS) or app-based businesses, taxability depends heavily on whether the state classifies software access as tangible personal property, a digital good, or a service — and whether delivery is viewed as electronically transferred or hosted. As of 2024, 22 states tax SaaS in some form (Bloomberg Tax State Tax Analyzer, digital goods taxability chart (2024)).

SUCCESSOR LIABILITY AND AUDIT TRIGGERS

Buyers should not assume that asset transactions insulate them from historical SALT liabilities. Many states extend successor liability through statutory or judicial means. For example, in New York, special rules and procedures must be followed when a sale of business assets in a bulk sale transaction takes place, to ensure the purchaser is not held personally liable for any of the seller’s unpaid sales or use taxes (see N.Y. Tax Law §1141(c) and NYS Dept. of Taxation and Finance, TB-ST-70).

Post-closing audits are common, especially when an ownership change is flagged in the state systems. Buyers should obtain copies of prior audit reports, confirm any open issues, and review statutes of limitation on prior periods.

Where exposure exists, buyers may consider indemnification provisions, escrow accounts, or preclosing voluntary disclosure agreements to resolve liabilities anonymously and mitigate penalties.

POST-CLOSING INTEGRATION

SALT diligence is not complete at closing. Integration must address:

• Re-registration and tax account updates in all affected jurisdictions;
• Consolidation of exemption certificates and tax coding systems; and
• Evaluation of whether the buyer’s existing operations create nexus in additional jurisdictions for the newly acquired entity.

A failure to align systems — particularly enterprise resource planning setups for sales/use tax, procurement, and financial reporting — can result in cascading compliance failures after closing.

ACHIEVING CLIENT WINS AMID RISKS

As state tax regimes grow more assertive, buyers must treat SALT diligence as a core component of transaction strategy. The consequences of neglect are no longer speculative — they’re real, material, and increasingly frequent.

Understanding a target’s state footprint, evaluating nexus and compliance, identifying successor risks, and harmonizing structures across jurisdictions are all essential to preserving deal value. As practitioners, our role is to translate evolving SALT rules into actionable steps that protect both the deal and the client.

About the author

Karen A. Lake, CPA, is a director of tax services with Berkowitz Pollack Brant Advisors + CPAs in Fort Lauderdale, Fla. To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com

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