All-access passes give event attendees a coveted passport to all of a venue’s choice areas and prime experiences.
That unlimited access tends to result in best experiences. The same holds true for information related to communications taxes in mergers & acquisition (M&A) transactions. The more access that due diligence teams have to communications tax policies, remittance histories, liabilities and other crucial documentation, the more likely parties on both sides of the deal are to achieve optimal outcomes. On the other hand, limited access to communications tax data and information can lead to unwelcome surprises, require sellers to increase liability reserves, alter the deal’s structure and price, and create more friction during post-merger integration activities.
Communications tax risks and liabilities arise in more M&A transactions because a rapidly expanding number companies outside of the traditional telecommunications industry are subject to state and local communications taxes.
Ongoing digital transformation efforts, the explosive growth of digital services (think UCaaS, CCaaS, SMS Cloud/API, streaming video and music), and the rapid adoption of Internet of Things (IoT) technologies (think connected appliances, cars and other devices) means that more companies in all sectors must comply with communications taxes. The complexity of communications tax compliance continues to deepen thanks to their inherently complicated structure, continually changing state and local communications tax rules and rates, and the ongoing nexus impacts of the U.S. Supreme Court’s 2018 South Dakota v. Wayfair decision.
As the frequency and magnitude of communications tax risks increase in M&A transactions, the teams responsible for conducting due diligence – a group that in most cases should include a representative from the tax function – can take the following actions:
- Be aware: Recognize that communications taxes are frequently misunderstood, overlooked and miscalculated – especially in organizations that operate in industries outside of telecommunications, but whose digital offerings subject them to compliance requirements.
- Address transaction tax compliance risks during due diligence: While most due diligence teams routinely assess corporate income tax liabilities during the due diligence process, transaction tax risks are sometimes neglected. Due diligence teams should apply the same level of scrutiny to sales tax and communications tax risks that they apply to income tax liabilities.
- Access as much information as possible: The more access M&A transaction partners have to communications tax information, the better. Buyers will want to find out about the tax positions of the target company. Without that information, buy-side teams make assumptions – some of which are accurate and some of which are not.
A communications tax engine is an ideal repository for this type of information because it provides access to all of the information M&A teams need to assess liability. Without that access, due diligence remains cordoned off from a crucial variable that can have a major impact on their consolidation experience.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.