Back in the early days of my career and marriage (in Decatur, Illinois), my wife and I grabbed some lunch from a fast-food joint and drove down to the lake. It was a little chilly that day, so we just stayed in the car while we ate and looked out over the lake. The sun made it feel a little warm in the car, so we kept all of the windows slighly cracked open. It was a beautiful day until............
All of a sudden, we heard a "caw, caw" as a flock of birds were flying over and then........."woosh." The flock of birds had decided to drop a bomb on us all at once. The whole car was covered in (you guessed it) bird poo. It smelled so bad. It was everywhere. Oh yeah, did I mention, the windows were all slightly open? So some of the bird poo got in the car and we could definitely smell it really good.
We immediately rolled the windows up .Then drove (a long way) to the closest car wash we could find. All the while, waving at people as we drove down the road with my car covered in bird poo. Good times.
What's the point of this story?
How does this have anything to do with state taxes?
Well, just as in life, you could have a great plan for your business and think everything is going splendid. Things could be going smoothly, running like clock work and then, "bam." Surprise - here's an audit. A notice. Or you wait until you decide to sell the company and during the due diligence process you learn that your company has historical tax liabilities or exposure that the buyer wants you to clean-up or adjust the purchase price.
There are a lot of grey areas and uncertainties in state tax law that impact busineses of all sizes. Unfortunately, these uncertainties if unaddressed can creep up on you and drop a bomb when you least expect it.
HOW DO YOU ELIMINATE STATE TAX RISK?
There are proactive measures a company can take such as a nexus review, taxability review, performing reverse audits, etc. Then the company can make an informed decision as to the best methods to resolve or move forward.
The situation that complicates the risk analysis is when you know the position is going to be reviewed by a potential buyer of the company in the near future.
If undergoing due diligence, how do you prove to the buyer (and their accounting firm) that the risk does not exist?
What if the state's law and rulings do not provide concrete or consistent guidance?
Do you seek a private letter ruling request or simply document the position in a memorandum for the file and hope the buyer (and their accounting firm) under due diligence will remove the risk?
As an advisor to both sellers and buyers during due diligence, I am always an advocate for the party I am advising. I always support the company's positions with all available legal authority. Sometimes its clean-cut. Sometimes it's not.
However, even when there is substantial authority, if you can't get to "more likely than not," would you advise the buyer to conclude there is no risk? Would you advise the buyer to not hold money back in escrow or reduce the purchase price or insert some other protection into the agreement?
Despite a history of not filing based on a nontaxable position and the fact that the company has not received any contact (notices, assessments, etc.) from the state, will the buyer agree no risk exists?
Even if there is substantial authority, a buyer (and their accounting firm) may still disagree.
So is the company's best course of action to request a private letter ruling?
If the company wasn't considering a sale in the future, you may simply document the file and let "sleeping dogs lie." But since the company is considering a sale in the future and you don't want the issue to be a sticking point under due diligence, you may advise the company to pursue the ruling request.
The side benefit of pursuing a ruling request is that the company will gain some level of certainty even if the company never sells. I say "level of certainty" because a ruling is only as good as the facts presented and the law at the time of the ruling. If the facts aren't accurately communicated, the conclusion could be disputed.
Awww, the fun of state taxes.
QUOTES TO CONSIDER
"If you choose not to decide, you have still made a choice." - Geddy Lee
"The way we see the problem is the problem" - Stephen R. Covey
"Most see what is before them; the strategic leaders sense what is around the corner." - Kirby Martzall
"In the bullfight, the bull perceives the cape as the problem, but it is the sword that kills him. Are you chasing the cape or the sword?" - Mike Bell