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Sales and use tax presents a higher risk than what you might think

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Sales and use tax is an area of risk not always given great attention by private equity deal-makers. However, the middle-market businesses scouted by these investors often contain hidden tax liabilities that can damage a deal years after the acquisition papers are signed. It’s not that fund managers are unaware that sales and use tax is a tax liability when purchasing a company—they accept that small businesses typically don’t have the in-house resources to effectively monitor interstate tax obligations—but that the level of tax risk they’re accepting can often be much higher than what they imagine.

A business with potential sales and use tax liability, which can easily run into the hundreds of thousands of dollars, or even millions, depending on the company size, is an ongoing risk until the problem is addressed. A business may have escaped a state tax authority’s attention pre-acquisition, only to become subject to an audit after the deal is completed. And today, municipalities and state governments are more desperate for revenue, so audits have become much more aggressive—resulting in auditors interpreting the laws more liberally in favor of the state.

Accordingly, sales and use tax should be given more consideration in the due diligence process.

Read more about this topic in our article, Consciousness raising, which was published in Private Funds Management.

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