Sales and Use Taxes: Mergers and Acquisitions (Portfolio 1370)

Bloomberg Tax Portfolio, Sales and Use Taxes: Mergers and Acquisitions, No. 1370-2nd, discusses the principle sales and use tax concepts that should be addressed – but are often overlooked – in structuring a merger or acquisition. To view this Portfolio, visit Bloomberg Tax for a free trial.  

Bloomberg Tax

This Portfolio is available with a subscription to Bloomberg Tax, a comprehensive research solution including over 500 Tax Management Portfolios™, practice tools, primary sources and timely news.

Description

Bloomberg Tax Portfolio, Sales and Use Taxes: Mergers and Acquisitions, No. 1370-2nd, discusses the principle sales and use tax concepts that should be addressed – but are often overlooked – in structuring a merger or acquisition. In addition, the state tax provisions applicable to other common corporate transactions, including bulk sales, liquidations, and incorporations are examined. The Portfolio also discusses the general concepts that will impact most of these transactions, such as the dividing line between tangible and intangible property and exemptions (e.g., the “casual sales” or “isolated sales” exemption, the “sales for resale” exemption, and other state–specific exemptions). The Portfolio concentrates on generally applicable principles with a particular focus on the laws of some of the larger states.

Service providers also face complex nexus issues. In states that do not have clear nexus rules, taxpayers may have a state assert its taxing jurisdiction on the basis of either very few contacts or novel nexus theories. These taxpayers do not receive the protection of a statute of limitations on assessment, as they reasonably believed that they were under no obligation to file income tax returns in such states. Because most states’ sales and use tax statutory schemes were originally designed to simply impose a tax on retail sales, the merger and acquisition provisions of most statutes are hard to interpret, and can be very inconsistent. The sales tax planner must be ever diligent when involved in complex M&A transactions to insure that sales tax transaction form is rigidly followed in order to take maximum advantage of exemptions, where available, and to avoid triggering a taxable sale which could have been prevented.

The portfolio discusses both of these topics generally, paying particular attention to the applicable pronouncements of the U.S. Supreme Court. The discussion following covers nexus and apportionment as applied on an industry–specific basis. Fundamentally, in any M&A transaction, because there is always a presumption of taxability where there is a transfer of tangible personal property, each significant asset must be examined to see whether the sales tax normally applies, and whether the various exemptions such as sale for resale, manufacturing processing, R&D, casual or isolated sales, or reorganization provisions can be applied. A chapter devoted to due diligence considerations analyzes the practical aspects of M&A transactions and their impact on sales and use tax compliance. For example, some jurisdictions exclude property such as motor vehicles and aircraft from the occasional sales exemption.

Subscribers to the Internet version of the Portfolio will find late-breaking developments reported in the Bloomberg Tax Daily Tax Report - State.

This portfolio should be cited as Cronin, 1370-2nd T.M., Sales and Use Taxes: Mergers and Acquisitions. Within the Multistate Tax Portfolio Series, however, references to the portfolios will include only the portfolio numbers and titles.

Authors

John J. Cronin, CPA

John J. Cronin, CPA (deceased) was a retired Tax Partner of Deloitte Tax, LLP. Prior to his retirement, he was the Partner in Charge of the firm's Multistate Tax Practice. He served as the Chairman of the Commerce Clearing House State Tax Advisory Board, and as a member of the advisory boards of the New York University State and Local Tax Institute, and the University of Wisconsin, Milwaukee Deloitte & Touche Center for Multistate Taxation.

Mr. Cronin was the 2003 recipient of the New York University distinguished service award, and the 2006 Frank C. Latcham award by Bloomberg Tax. He earned a BBA degree in Accounting from Iona College, and was a Certified Public Accountant in the states of California, New York, and New Jersey.

Table of Contents

Detailed Analysis
1370.01. INTRODUCTION
A. Overview
B. Topics Covered by Portfolio
1370.02. ACQUISITIONS, MERGERS, AND REORGANIZATIONS
A. Types of Acquisition Transactions
1. Cash Transaction
2. Stock
B. Summary of Federal Income Tax Principles
1. Taxable Cash Purchase
2. Allocation of Purchase Price
3. I.R.C. Section 338 (h)(10) Elections
4. Cash Purchase of Stock
5. Federal Tax-Free, or Partially Tax-Free Acquisition of a Target's Stock for the Purchaser's Stock
a. Statutory Mergers or Consolidations Under Section 368(a)(1)(A) (Type A Reorganizations)
b. Acquisitions of Stock for Voting Stock Under§ 368(a)(1)(B) (Type B Reorganizations)
c. Acquisitions of Property for Voting Stock Under § 368(a)(1)(C) (Type C Reorganizations)
d. Corporate Divisions Under § 368(a)(1)(D) (Type D Reorganizations) or § 355 of the Code
e. Miscellaneous Forms of Corporate Reorganizations and Corporate Divisions
f. Sales Tax Implications of Merger Transactions Provided for Under the Internal Revenue Code
C. Statutory Merger or Consolidation
D. Stock for Stock Acquisitions
E. Stock for Asset Acquisitions
F. Corporate Split-Ups
G. Recapitalizations
H. Changes in Form or Identity
I. Liquidations
1370.03. GENERAL SALES AND USE TAX CONCEPTS APPLICABLE TO ACQUISITION TRANSACTIONS
A. Definitions
1. Sale
2. Consideration for a Sale
3. Lease
4. Sale at Retail
5. Storage, Use, or Other Consumption of Purchased Assets
6. Other Variations on the Resale Exemption
7. Classifications in Asset Purchase Transactions
8. Classification as Tangible Personal Property
a. Distinguished from Real Property
b. Distinguished From Intangibles
c. Distinguished From Services
9. Other Property
10. Location of the Sale
B. Seller's Permit
C. Series of Sales
D. Sales for Resale
1370.04. SALES OF ASSETS
A. Introduction
B. Occasional Sale Exemptions
C. Sale for Resale Exemption
D. Manufacturing Machinery and Equipment Exemption
E. Bulk Sales and Successor Liability
1. Bulk Sale Notification
2. Withholding
3. Personal Liability of Corporate Officers
F. Intercompany Accounts
1370.05. NEXUS IMPLICATIONS OF ACQUIRING CERTAIN ENTITIES
A. State Interpretation of Nexus
B. Nexus and Merger and Acquisition Transactions
1370.06. TRANSFERS UNDER INTERNAL REVENUE CODE SECTION 351
A. Nonrecognition Treatment
B. Transfers to Newly Formed Corporations
1. Nontaxable Transfer: Solely in Exchange for First-Issue Stock
2. Exempt: Transfers on Organization of a Corporation
3. Exempt: Transfer of Property Upon Organization in Consideration for Issuance of Stock
4. Other Approaches
C. Transfers Including Debt Assumption and Other Consideration
1370.07. DROP-KICKS: DROP-DOWN OF ASSETS FOLLOWED BY STOCK SALE
A. Introduction
B. Exemption for Drop-Down
C. Step Transaction Doctrine
D. Successor Liability
1370.08. EXERCISING DUE DILIGENCE FOR M&A SALES TAX ISSUES
A. Introduction
B. Statutory Merger or Consolidation
C. Stock for Stock Acquisitions
D. Stock for Asset Acquisitions
E. Cash for Stock Acquisitions
F. Corporate Split-Ups
G. Recapitalizations
H. Changes in Form or Identity

Working Papers

Item Description Sheet
Worksheet 1 Diagram of Type “A” Reorganization
Worksheet 2 Diagram of Type “B” Reorganization
Worksheet 3 Diagram of Type “C” Reorganization
Worksheet 4 Diagram of Type “D” Reorganization with I.R.C. “Spin-Off” Distribution
Worksheet 5 Beatrice Co. v. State Bd. of Equalization, 6 Cal.4th 767, 25 Cal.Rptr.2d 438, 863 P.2d 683 (1993)
Worksheet 6 Intl. Paper Co. v. Cohen, 126 P.3d 222 (Colo. Ct. App. 2006)
Worksheet 7 Matter of Noar Trucking Co. v. State Tax Commn., 139 A.D.2d 869, 527 N.Y.S.2d 597 (App Div, 3d Dept 1988)
Worksheet 8 Sales and Use Tax Aspects of Acquisitions, Mergers, and Divestitures
Worksheet 9 MTC Nexus Program Bulletin NB 95-1
Worksheet 10 MTC Exchange of Information Agreement (Sales and Use Tax)
Worksheet 11 Multistate Tax Compact
Worksheet 12 MTC Uniform Sales & Use Tax Exemption/Resale Certificate -- Multijurisdiction
Worksheet 13 Certificate of Exemption -- Streamlined Sales and Use Tax Agreement
Worksheet 14 Streamlined Sales Tax Governing Board, Streamlined Sales and Use Tax Agreement