Joe Valley works for Quiet Light Brokerage, a firm that specializes in selling online businesses. The question of sales tax nexus has been raised to them more frequently in the last six months than it has in the previous five years combined. This article will attempt to tackle this urgent issue and address potential solutions.
The Ticking Time Bomb of Uncollected Sales Taxes
Quiet Light Brokerage recently helped a couple who sold their business for nearly $1 million. However, the sale of their business was delayed due to an unforeseen issue with sales tax.
Business owners who hope to eventually sell their companies should maximize value by preparing in advance. With sales taxes becoming more of a hot topic and a major concern for prospective buyers, gaining insights from some of Quiet Light’s clients may be beneficial in determining best practices to prepare for future sales.
A Simple Amazon Store
The couple selling their business started an Amazon Store in which they distributed their own brand of art supplies. The business model was simple, the niche was hot, and the brand took off. Within 18 months they had topped $1.4 million in total revenue, and were hoping to surpass $1.5 million in 2016.
When they listed the business for sale, they received two solid offers within ten days. While each offer was strong and relatively similar in monetary terms, one buyer stood out and the couple chose his offer over the other.
Due to the brand and simplicity of the business model, both sides expected due diligence to go smoothly and be completed within a couple of weeks. After this, the process would move on to the Asset Purchase Agreement, with the two sides eventually closing in a total of four weeks. However, this timetable did not come to fruition because of information unearthed during the due diligence process.
Trouble in Due Diligence
When making a transaction involving a significant amount of money, buyers do not want any surprises. After all, once the money has been handed over, any historical issues become the new owner’s problems. Because of this, it makes sense that a prospective buyer would like to uncover potential minefields before money changes hands.
The due diligence process is a difficult but necessary examination of the business and verification that everything that has been disclosed is correct and complete. For instance: Are the financials in order? Are there any pending lawsuits? Do any vendors want to renegotiate their contracts? Do any products suffer from quality control issues?
Due diligence is essential for two reasons: Not every seller is totally honest, and many sellers make honest mistakes or omissions.
Fortunately, completing due diligence on an Amazon business is not difficult. After about ten days of digging into the numbers, the sale looked good to the buyer with the exception of one critical area: Sales tax. The couple selling their business had chosen not to collect sales taxes throughout their 18-month history.
Since the sellers had elected not to collect sales tax, the buyer was unwilling to assume the potential risk of states collecting any unfiled taxes. As the new owner of the business, he would have been liable to file and pay any uncollected taxes and associated fees for the 18 months prior to the sale.
Collecting Sales Tax
Sales tax obligation (nexus) is becoming a hot topic among Amazon Sellers. As is the case with all Amazon FBA sellers, nexus is established by storing products in Amazon warehouses.
During transaction of business assets, a buyer will want a sales tax clearance certificate from each state where nexus exists. A sales tax clearance certificate is a document from a state in which the seller has nexus, showing that all its tax liabilities have been paid in full. This ensures that no liabilities carry forward to a new owner of the business’ assets.
A Buyer’s Research on Nexus
The biggest area of concern for potential buyers with regard to sales taxes is that they could be liable for any uncollected and unpaid taxes prior to their ownership.
In this case, the buyer had done his research. He reviewed articles, spoke with experts on tax nexus and ultimately came to the conclusion that he would, in fact, be at risk for uncollected sales tax prior to his ownership. The tipping point was this article by the American Bar Association.
Based on the total sales made during the history of the business, both the buyer and seller estimated that about $70,000 should have been collected. This money should have then been disbursed to the individual states where nexus existed.
The buyer refused to take this risk on, and insisted on a price reduction of $70,000.
The Near Death of a Million Dollar Deal
Deciding between closing a deal with a buyer with whom a relationship has been established at a reduced price or moving on to a new buyer is a tough choice. In this case, the sellers chose to move forward with the deal and pay the sales tax out of pocket. If they had properly collected sales tax from each transaction, their cost of collection and remitting would have been a few thousand dollars. Instead of collecting taxes up front, the sellers ultimately received $70,000 less for their business than they should have.
The cost of compliance is a minimal up-front investment compared to reporting and filing on historical taxes. In this case, the cost of non-compliance cost the sellers $70,000.
As this story highlights, it is important for those who plan to sell their businesses to maintain sales tax compliance. The cost of compliance is a minimal up-front investment compared to reporting and filing on historical taxes. In this case, the cost of non-compliance cost the sellers $70,000.
Options for Filing Sales Tax
This story is a great example of how neglecting to collect sales tax up front could lead to real problems in the long run. In this case, the punishment was a loss of $70,000. In the end, business owners have to choose how they want to manage their compliance. For those who do want to start collecting sales tax, there are three ways in which this process can be done: Do it manually, hire someone to do it, or automate it with a solution like Taxify.
Stay on top of the sales tax challenges your business faces with Taxify by Sovos.