Property tax and licensing compliance for mergers and acquisitions

According to Gartner, in 2024, the success of enterprises entering into mergers and acquisitions (M&A) depends partly on their ability to navigate “an increasingly complex regulatory environment.” While Gartner points to anti-competition and national security as significant concerns and subjects of scrutiny, companies must also consider how M&A activity can make property tax compliance and licensing more complex.

We often discuss how M&A activity can impact sales and use tax compliance. As you gain offices and stores in new locations, increase your remote workforce, and sell into new states, your business can create nexus in new jurisdictions. Establishing nexus brings additional tax registration and reporting requirements.

Property tax and license compliance are like sales tax compliance in that businesses that overlook these regulatory areas or handle them the wrong way open the door to unexpected costs and penalties. When it comes to compliance, foresight wins. Taking appropriate action well in advance of finalizing an M&A deal can help your business ensure a smooth transition and make it easier to stay compliant going forward.

There’s much to consider, so we’ll focus on property tax compliance first. Property tax compliance during a merger or acquisition can be broken down into two stages: what happens during the M&A due diligence phase and what occurs after the transition. 

When you acquire another business, your company becomes responsible for paying property tax on the target company’s real estate and tangible personal property assets. There are 37 states that tax personal property, but not all movable property is subject to tax, even within these states. As part of due diligence, it’s essential to understand the tax position of the company being acquired. You should know how much property tax the business pays and whether past tax filings align with your business’s strategy.

Tax time can become especially tricky if the acquired company hasn’t kept good records. You could discover that the target company didn’t report certain assets. When evaluating your property tax assessment, the county assessor could determine an unreasonable value for those assets and even apply penalties. To help avoid this, you need to communicate with the assessor what you paid for those assets and explain that you may not have the assets’ historical cost.

Learn more in our on-demand webinar, Essential property tax compliance considerations during mergers and acquisitions.  

There are often other complications. County assessors base their tangible personal property tax assessment on several criteria, including how much each asset costs at purchase and how that value has changed based on depreciation. The values of assets can vary when acquired during a merger or acquisition.

Common accounting standards require businesses to use the purchase price allocation method for M&A deals. The purchase price allocation method considers the total value of assets of an acquired company less its liabilities, a write-up (adjustment) if the assets are valued at less than fair market value, and goodwill. Goodwill is calculated as a difference between the purchase price and fair market value when the amount paid exceeds the target company’s net value of its assets minus liabilities.

Purchased assets are typically written up at the agreed price post-merger, which becomes the fair value for accounting but not the fair market value for property tax purposes. If your company is the acquirer, you’ll account for the fair value in your books. For example, your books would show the value of an asset as $50,000 because that’s what you paid, not the $100,000 the seller paid years ago, and you wouldn’t account for depreciation because the year that asset was acquired is adjusted.

There also may be trouble when it’s time to file your property tax return the following year if the assessor doesn’t want to accept that accounting cost. The assessor may argue that they recognize that asset, know the original owner acquired it nine years ago for $100,000, and require you to report on the original cost basis. 

Furthermore, using standard depreciation tables, the assessor might value that asset at $60,000 after factoring in depreciation, even though you only paid $50,000. That’s obsolescence, a loss in value that can lower the tax owed, and something the assessor may only consider if you explain the circumstances when filing an appeal.

To make matters more complex, that asset’s status might have changed since your company bought it if you or the original purchaser made improvements or decided to use it no longer. In that case, consider filing on a deletions and additions basis. If you liquidate assets, you must communicate with the assessor that you require an adjustment for the liquidation value and shouldn’t assume the assessor will automatically provide one. It pays to be proactive about property tax compliance in M&A situations.

While managing your property tax compliance, you must also consider how you’ll obtain the proper business licenses. Without them, your company might not be able to legally operate immediately following a merger or acquisition, warns Andrea Jaffe, Senior Director of Professional Services at Avalara.

Case in point: If your business involves selling alcohol, tobacco, or vape products, and you don’t have the required state licenses and permits, you either don’t trade and take a financial hit, or risk severe consequences. Beverage alcohol and tobacco and vape are specialized industries in which tax compliance is complicated as well. 

But even if your business isn’t part of a heavily regulated industry, not having valid licenses can trip you up. Some retailers will postpone mergers, acquisitions, or reorganizations until after the holiday shopping season because they don’t want to risk business disruption.

Even if the acquiring and target companies have all the correct licenses beforehand, those licenses may not be in good standing once the merger or acquisition becomes final. Taking on a spin-off, divesting a certain number of stores, changing a company name, or rolling a company up into a new entity with a different Employer Identification Number (EIN) can inadvertently unhinge a related license. Sometimes, companies don’t even realize there’s a problem until after the fact, when, for example, a vendor asks if they can ship goods.

To help avoid regret and frustration, your business should prepare for licensing compliance early during the M&A process. Ensuring you have valid licenses at the right time requires understanding application requirements. Some licenses can be transferred and allowed to continue, while others must be replaced. Specific licenses require waiting periods, or your business may need an inspection. Remember that how you structure the acquisition can often impact licensing consequences downstream, sometimes quite dramatically, so having a licensing expert weigh in early during discussions can be beneficial.

With everything on your plate during a merger or acquisition, property tax and licensing compliance can easily fall by the wayside. Fortunately, solutions and services exist to take the burden off of your team so you can focus on other priorities.

Avalara Property Tax makes submitting accurate returns the first time you file post-merger easier and provides features that help you manage property tax going forward. The solution lets you explain how an asset has changed from the previous year to the current one and report additions and deletions. Avalara Property Tax allows you to adjust an asset’s cost and acquisition date, so you don’t have to re-upload data.

During due diligence, Avalara License Professional Services can provide consultation on how a merger or acquisition might affect your business’s licensing so you can react as needed. You can also get help applying for licenses and ensuring they’re ready to send to authorities when your deal becomes public. 

Once the deal is done, Avalara License Management can help your new or expanded business comply. The solution lets you streamline the renewal of hundreds to thousands of licenses, permits, and tax registrations.

With property tax and licensing compliance in check, you can truly celebrate your businesses coming together.

This post has been updated. It originally published February 23, 2024.