Learn about a legal case where a buyer was refunded $3.5 million due to an unemployment tax issue that arose after an M&A deal. Understand the importance of considering unemployment compensation tax when acquiring a business with employee turnover.
July 10, 2020
Introduction:
When purchasing a business’s assets, considering unemployment compensation tax is crucial, especially if the new owner plans to keep the seller’s employees. There’s a risk of inheriting high unemployment costs if the seller had a history of employee turnover.
The Transaction:
In this case, both the buyer and seller were in the business of offering human resource services to small and medium businesses. The buyer paid $5.3 million to acquire the seller’s assets, mainly its client accounts. The payment was split between a $2.5 million initial payment and two promissory notes totaling about $2.8 million, secured by the assets sold. The seller’s officer was responsible for helping transition clients to the buyer.
The Issue:
After the deal was done, the buyer was informed by the Texas Workforce Commission that it was now seen as a successor employer to the seller. As a result, Texas increased the buyer’s unemployment tax rate, leading to around $3.5 million in additional taxes. The buyer paid the taxes and sued for a refund but initially lost in a Texas court.
Legal Battle and Outcome:
The buyer appealed the decision and won. The higher court disagreed with the initial ruling, stating that there was no evidence the seller continued managing the client accounts after the buyer took over. This case highlights the importance of whether there’s significant ongoing control or management between the entities involved in a merger or acquisition.
Key Lesson:
This situation underscores the potential unemployment tax risk when acquiring a business with high employee turnover, like a human resource service provider. Additionally, if the seller retains control over the necessary business assets post-sale, the buyer might inherit the seller’s unemployment rating. However, in this case, the buyer was saved from this outcome because the seller’s officers were the secured parties, not the seller itself.
Case Reference: G&A Outsourcing IV, LLC v. Texas Workforce Commission, No. 03-16-00752-CV, Court of Appeals of Texas, Third District, Austin, (Filed August 17, 2017)
By John McCauley: I help manage the tax risks associated with buying or selling a business.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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