The Growing Importance of Sales and Use Tax During Acquisition Due Diligence (M&A)

The 2017 Tax Cuts and Jobs Act which reduced the U.S. corporate federal income tax rate to 21 percent and created an incentive for companies to repatriate foreign earnings, also helped boost interest in domestic investment. The U.S. became a more attractive option for inbound M&A activity as 2018 saw more deals, including several “mega deals” across many industries. While some observers have voiced concerns about an impending economic correction or downturn, many economists predict that both corporate and private equity investors will continue to enjoy record access to capital as they continue to invest heavily in the technology, healthcare, and energy sectors.

As deal teams rush to provide proper valuations and conduct financial and tax due diligence, sales and use tax due diligence is more important than ever and can even be the most significant tax exposure uncovered in the due diligence process. Thus, neglecting sales and use taxes in due diligence can result in an unpleasant surprise for the acquirer after the deal closes and can become a major pain point for the Chief Financial Officer, whose team will then need to identify, quantify, and remediate the exposures.