Back Sales Taxes

May 14, 2023

by a searcher from Lousiana State University in Houston, TX, USA

Has anyone looked at a deal where the company is delinquent on sales taxes?

The sales tax liability is material - about $1.8 million on a company doing $5 million in revenue. Clearly, this is a red flag but management has been upfront about it and the owner intends to use the sales proceeds to repay the tax liability.

Could something like this get bank financing if the proceeds sit in escrow for tax liability repayment?

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Reply by a professional
from New York University in New York, NY, USA

It's very common, though the amount ($1.8MM on $5MM of revenue) is very high as sales taxes are generally in the 5-8% range. I would also try to get a sense of the interest and enter into a VDA to abate penalties. I'd say 20-30% of my deals have sales tax issues, but this is a very high one. You want to put a LARGE chunk into escrow and deal with it like a purchase price adjustment where the seller gets the $$$ after the VDAs are complete. I wouldn't buy the company without a VDA because sales tax liabilities have personal liability even if there's there's an entity. I've never seen a bank have an issue with it unless you don't have a plan to deal with it.

Reply by a searcher
from University of Pennsylvania in Atlanta, GA, USA

I closed on a deal where the seller owed sales tax liabilities. The seller wasn't willing to sign VDAs and preferred to use the seller note to offset his liability only if the state came after it. I had an accounting firm estimate the amount plus interest and penalties to ensure the seller's note was more than adequate. Honestly, I didn't bring this up with the bank. The seller note was enough to move forward with the deal and ensure that I was protected.

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