What’s the Big Deal About “Nexus” for Business Purchase and Sale Transactions?

You probably missed it. But in mid-April, a case from the state of South Dakota was argued before the U.S. Supreme Court. And it was all about “nexus.” Nexus is all about connections. South Dakota has been taxing all internet sales (in excess of certain deminimis amounts) to its residents initiated from out-of-state sellers. South Dakota was sued based on a 1992 U.S. Supreme Court Case that held an out-of-state company could not be taxed on sales to residents within that state unless the company had a physical presence in that state. That was interpreted as meaning a “bricks and mortar” presence.

Over the years since then, both the methods of selling and the needs of states to gain revenue has caused an aggressive approach by most states to try and tap the potential revenue from cross-border sales in ever-expanding ways. These out-of-state sellers are often shocked to find correspondence from revenue departments of other states demanding payment of sales taxes, interest and penalties. While this issue has been developing for many years, the US government has not delivered a uniform law on this subject, which led many states to utilize creative ways to extend the net of sales tax liability.  A decision by the U.S. Supreme Court on this South Dakota case is not expected until sometime early summer. And what that decision might be is anyone’s guess.

What’s The Big Deal About “Nexus” for Business Purchase and Sale Transactions?

While this issue is important in the context of day-to-day operations for businesses selling to out-of-state customers and their accountants, it has also great import for potential purchasers and sellers of businesses as to what the potential of liability for unpaid sales tax might be for out of state sales. The purpose of this blog is to call attention to the latter scenario.

I have a sense that there are likely many companies out there that unknowingly are not in compliance with their sales tax obligations for out-of-state sales. For potential purchasers of businesses, they would be wise to increase their due diligence in the sales tax area to get a good feel for the liability exposure that might exist. This will likely create a need for sales-tax liability hold-backs, additional note offset provisions and tighter indemnities. For potential sellers of businesses, this is an area that should be dealt with before the businesses are put up for sale. Potential buyers tend to get spooked by undisclosed issues that they find during their due diligence, causing them to wonder what other problems might exist under the surface.

 

Michael Margrave
mmargrave@mclawfirm.com
480-994-2000

 

Disclaimer: This blog is for information purposes only. Legal advice is provided only through a formal, written attorney/client agreement.