Would you believe that sales tax and international value-added tax (VAT) compliance is a big reason for a seller walking away during due diligence? It shouldn’t be a surprise when you think about how complicated it is to manage your sales and value-added tax compliance when each state and country has a different set of rules and rates that are constantly changing.
The first issue that many companies fail to realize is that they may have nexus in a jurisdiction they didn’t think they did. A business may have sales tax nexus if it has a physical presence (office, warehouse, agency, employees, shipping point, etc) in a particular state. There are nuances to be careful of for each jurisdiction. For example, a state may deem you to have a physical presence even if you make regular visits there but no actual employees. Secondly, it is important to realize whether you are selling tangible personal property or a service and how each state imposes sales tax on each of those. Even though this may seem obvious, in certain types of businesses such as software or internet services, there may be a fine line. Finally, with the current state and county budget deficiencies, sales tax rates and rules are changing rapidly and it’s important to make sure you have current information. Beware also that different counties in a state may impose additional sales tax as well.
Failing to pay the correct amount of sales tax can be a large liability to your company or a buyer when they purchase your company. If a particular jurisdiction four years later determines that your company should have been collecting sales tax from the end-user, it will be up to your company to collect that back-tax from your customers or the burden will fall on your company. Even though you may feel safe because you are selling goods over state lines, you should really make sure you have resale certificates from your resellers. That way, if an issue arises, you can make a defensible case for yourself.
Value-added taxes (VAT) are generally used by international governments to accomplish something similar to sales tax. Canada and countries in Europe, Asia Pacific, and Latin America typically utilize value-added taxes instead of sales taxes. The primary difference is that instead of the taxing jurisdiction receving all of the tax revenue when the end-user purchases the goods, it receives revenue on each component of...