Sales Tax in M&A: What You Don’t Know Can Hurt You

“Sales Tax? I don’t owe that - I sell software.”

“Sales Tax? I don’t owe that - I don’t sell that much online.”

“Sales Tax? It’s an asset sale - liabilities don’t transfer.”

This is the chorus I hear from many business owners. I get it - taxes are never exciting, and sales tax is particularly unloved. But there’s one time you want your tax situation to be flawless: during M&A. A clean tax record is a great selling point.

But what if your taxes aren’t so clean? Thinking about doing an asset sale? Think again. In many cases, sales tax and payroll tax liabilities can attach to the assets and carry over with the acquisition. This is called successor liability, and depends on the state and nature of the deal.  

TL;DR – tidy up your sales tax liabilities before M&A talks begin. The last thing you need is a can of sales tax worms popping open just as you're trying to sign an LOI—only for some due diligence accountant, working in a dark room like Gollum, to discover you’ve triggered nexus all over the U.S. and been delinquent for years.

Business Taxes: A Quick Rundown

Your business should be aware of the following tax categories:

1) Income Tax (Federal, State, Local)

2) Payroll Tax (Social Security, Medicare, Unemployment Tax, Paid Family Leave)

3) Sales Tax & Use Tax

4) Miscellaneous Taxes (Franchise tax, gross receipts tax, property tax, commercial rent taxes, special project taxes)

Most business owners are familiar with income and payroll tax. The biggest blind spot? Sales and use tax. Many assume that if they don’t operate a brick-and-mortar store, sales tax doesn’t apply. That might have been true 30 years ago, but the rise of online sales changed everything. States are updating their rules, and it’s on businesses to keep up.

The tricky part? There’s no centralized source like the IRS. State and local tax rules are complex, layered, and often buried in PDFs from 1996.

Sales Tax: What’s Actually Taxable?

Many people think of sales tax purely from a physical product point of view, and business owners need to rethink this perception. Remember when you used to walk into an office supply store and buy shrink-wrapped CDs of Windows 95 and The Sims? Some states still live in that shiny-disc world. Even if your software is entirely online, some states still treat it like you're shipping out CDs from your garage.

Some states have modernized and differentiate between types of software. But to get it right, you need to closely analyze what you're selling. Tax software platforms use item taxability codes - and there are 170+ containing “software” alone in one popular database. Here are the key questions to answer:

1.     Can the customer control or edit the code?

2.     Is the software hosted on your servers or theirs?

3.     Is it “canned” (identical copy for every customer) or customized?

4.     Do you offer ongoing support?

5.     Are you selling B2B, B2C, or both?

6.     How many transactions do you have per state?

7.     What's your total sales volume into each state?

Where Do You Owe Sales Tax?

Nexus is a dirty word in the accounting space, but a term business owners should be deeply familiar with. Nexus means your business has enough of a connection to a state (through sales, employees, property, or time spent) that the state expects you to file a tax return.

Sales tax nexus is usually triggered by:

• Transaction count (commonly 200/year)

• Sales volume (commonly $100,000/year)

* While thresholds vary, most states follow the Wayfair standard of $100K in annual sales or 200 transactions.

Transaction count can trigger nexus for a lot of SaaS companies. Even if you’re not selling high dollar value software, those recurring monthly charges can add up quickly. Pro tip: Review your Ship-To addresses monthly. Many payment processors will flag potential nexus—or at least send warning emails (which most people ignore until it’s too late).

 

How Do You Become Compliant? 

Sales tax compliance isn’t rocket science once you’re set up. Think of it like a rotisserie chicken: set it and forget it!

1) Identify where you have nexus – Review sales volume and transaction count per state (you may have triggered nexus years ago)  

2) Classify your product - Work with an accountant or use a taxability database to choose the correct taxability code

3) Set up a tax platform – Tools like Avalara or TaxJar handle the heavy lifting of calculation, collection, and remittance. Once configured, they require minimal maintenance - though changes in your product offering or expansion into new states call for a quick review.

What’s a VDA—and Should You Do One?

Just realized you’ve been delinquent for years?  A Voluntary Disclosure Agreement (VDA) is the best way to atone for your sales tax sins. With a VDA, you proactively reach out to a state and say, “Hey, we messed up, but we want to make this right.” Many states have automated portals and templates for this now, making the process less painful.

Benefits may include:

• Waived penalties and interest

• Limited lookback period (usually 3–4 years)

• A chance to clean things up before M&A due diligence shines a flashlight on it

In some cases, especially with B2B clients, you may be able to go back and recover the past sales tax owed. Technically the flip side of sales tax is use tax (tax that a buyer should self-assess if the seller doesn’t charge them at the point of sale). So don’t feel guilty about collecting sales tax. Whether you charge it or not, someone’s on the hook.

If you skip the VDA, you risk the state knocking on your door years later with a surprise audit. With the rise of AI, more states have eyes on what goods & services their residents are buying. Think of it as a sales tax skeleton in the closet—waiting to jump out during due diligence.

Final Thoughts

Business owners are always chasing high-ROI investments, but one of the best returns out there often gets ignored: sales tax compliance. I get it—automating tax collection isn’t newsworthy, and no one’s going viral on LinkedIn for registering a sales tax account in New Jersey.

Still, think of sales tax compliance like investing in a hidden asset. It won’t dazzle anyone today, but it’ll quietly compound value and help you avoid landmines when it really matters—like during due diligence or an exit.

Bonus Round: Extra Frustrating Sales Tax

• Illinois doesn't tax typical SaaS products, but the city of Chicago does. That means you need to register with the city, but not with the state.

• Most services are generally sales tax exempt, but some states like Washington tax a variety of services, even consulting (unless you can prove that you don't use technology to assist you in consulting). Good luck with that.

• District of Columbia has a "Ballpark" tax based on gross receipts delivered (ship-to address) in DC. If you sell more than $5 million a year to DC customers, you will owe this gross receipts tax. This isn't a sales tax, but sales-tax adjacent since it requires businesses to track sales volume based on ship-to address. This is a tax literally designed to fund The Nationals baseball team stadium.

  
  

This is not tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.