A recent blog of mine (see May 24th “What’s the Big Deal…“) touched on the potential implications that a pending US Supreme Court decision could have on business purchase/sale transactions involving businesses with substantial internet retail sales to residents of other states. Purchasing such a company could result in potential exposure for unpaid sales taxes that would increase the need for adequate investigation and due diligence prior to closing the deal.
On June 21st, the US Supreme Court upheld the South Dakota statute charging a 4.5% sales tax on all out-of-state internet retail sales to persons within South Dakota provided that there were more than 200 transactions or the amount of sales were in excess of $200,000 annually. The South Dakota statute did not apply the sales tax retroactively to a time prior to enactment.
As often happens, this decision does not answer all questions. States with existing statutes will need to decide if they must to amend their statutes to fit within the parameters of the South Dakota decision or, if not, face the prospect of future legal challenges. A number of states without statutes are now seeking to enact statutes fitting within the South Dakota statutory parameters. Language in the Supreme Court opinion suggests that there could be loopholes to more aggressive statutes than the South Dakota model, particularly with respect to annual amounts and the applicability or retroactive provisions.
As to purchaser due diligence, the need for investigating the amount of out-of-state internet retail sales remains. And where such sales are substantial, there may be a need to have a purchase price adjustment clause, a purchase price holdback, appropriate indemnification provisions and/or personal guarantees. As pointed out in the previous blog, potential sellers should do self-audits to see if potential problems might exist for unpaid sales tax and for prepping for future sales of their businesses.
Disclaimer: This blog is for information purposes only. Legal advice is provided only through a formal, written attorney/client agreement.