Presented by Avalara
Growth strategies can vary widely among companies and industries. The catalyst to growth, or in some cases the outcome of growth, is an influx of new funding, intellectual or physical property, or technical capability resulting from financing events, mergers, and acquisitions, and even changes or upgrades to technology platforms.
During these dynamic change events, tax compliance often takes a backseat to other priorities. But it shouldn’t.
Company growth can vastly change your sales tax nexus footprint (the obligation to collect sales tax in a state based on sales activities in that state). Having a reliable, scalable plan in place to deal with any new tax obligations that result from these changes is imperative to avoid any lapses in compliance that could come back on you.
Here’s a look at three company-related activities that can have a dramatic impact on its tax liabilities.
1. Financing events
Companies need capital to grow. But backing a venture is a big decision — a risky one — and investors don’t fund deals without first doing their homework. For any financing event, public or private, investors not only look closely at how you plan to grow the business but also how you are managing it now. This includes tax compliance and audit histories.
The impact of sales tax on company valuation is often underestimated. But that can be detrimental. If there is a funding round, company sale, or IPO, being clean and consistent and having an auditable record is of the utmost importance. Poor sales tax management practices or unfavorable audit outcomes can impact valuation, jeopardize funding or even nullify deals.
High-visibility events like funding rounds and IPOs can also bring your business to the attention of state auditors looking to draw in more tax dollars. Companies with a higher profile and higher revenues tend to be chosen for audits more often warns Shane Ratigan, a tax attorney and compliance manager for Avalara.
Several states have nexus discovery units within their revenue departments that scour public information to find companies that are not compliant with their states’ laws. The more you “stand out from the crowd” among other businesses, the more likely they are to pay attention to your situation.
Andrew Johnson, Managing Partner at Peisner Johnson, LLP notes, “In some cases, an acquiring company requires the seller to provide a ‘tax clearance certificate’ or its equivalent from states where the target company is doing business. Certain states may also require buyers and sellers to give notice of a sale of the company.”
A phase of rapid growth can quickly change your tax profile. To avoid frequent reassessments of tax risk or worse, missing it altogether, it’s imperative to have a tax compliance plan that grows with your business. The plan should soberly address where you are likely to grow next and address those tax responsibilities up front.
2. Mergers and acquisitions
A good M&A strategy is important for growth, but from an operational standpoint, it can present challenges. After the deal is inked and the excitement wanes, you’re now faced with bringing together one or more organizations that, while aligned in some areas of the business, may not be in others.
It’s a concern that keeps company executives up at night. According to Deloitte’s M&A Trends year-end report, 2016, a sound due diligence process is one of the most important factors in achieving a successful M&A transaction.
The meshing together of people, assets, systems, and processes can be lengthy and complicated. Between due diligence, integration, accounting/financial reporting, and post-acquisition compliance, who has time for the minutia of sales tax? Not finance, operations, and IT; they’re focused elsewhere. Yet, many of the reasons for acquiring a business — more market share, a broader product mix, even physical property — are common tax liability triggers. During the integration process, it can be easy to overlook new or different tax obligations, such as nexus, jurisdictional rate changes, or product taxability rules. This can lead to over or undercharging sales tax and raise red flags with auditors.
Additionally, the target company may have been carrying tax attributes on its books or ongoing tax audits that could transfer to the new organization. If these aren’t properly identified and managed as part of the due diligence during the deal, they could cause compliance problems later.
3. Technology platform changes, consolidations, or upgrades
During periods of growth or change, it’s good practice for CFOs or controllers to dive deeper into how compliance is being managed, identify vulnerabilities, and look for new or better ways to operationalize or optimize the business.
CPA Firms understand the importance of indirect tax compliance and routinely advise clients to automate sales tax during systems integrations to reduce compliance costs and audit risk. Failure to properly integrate systems may prevent the company from “speaking with one voice” on the taxability of the same or similar products and services in a merger of equals. While it’s understandable that differences may exist early on in the process, such discrepancies are harder to explain or defend over time.
Changes to sales tax rates and rules are often done last minute or with minimal notice, so it’s not always easy to know when they happen or how they affect you. If you are having to make these updates manually in several different systems or server locations, it’s a lot harder to ensure consistency and timeliness, which could impact sales and customer service. Automating this process removes this risk.
Prepare for growth through automation
If your company is growing, it’s highly likely that you’ll be engaged in one or more of these change events. When that happens, your attention and resources will be strained and focused elsewhere — not on sales tax compliance.
Having sales tax automated in your ERP, ecommerce system, or other financial application ensures that you’re able to keep up with your compliance obligations as your business grows or changes. Cloud applications like Avalara that integrate easily with your existing systems help protect against lost or spotty data resulting from a platform change, upgrade, or consolidation. They can also help unite valuable transaction and tax data from disparate systems and processes so that your financial team isn’t delayed in closing the books and forced to pay costly penalties.
Dig deeper: For a deeper dive on this subject, read Avalara’s report: Three company growth-related activities that can be life (and tax) changing.
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