Explore a case study involving a New York-based buyer’s acquisition of an LLC’s equity and the subsequent controversy over a sales tax assessment on tangible personal property. Delve into the legal intricacies of M&A transactions and tax implications.
M&A Stories
February 26, 2021
Introduction:
In the realm of mergers and acquisitions (M&A), a fundamental understanding exists: sales tax applies to asset acquisitions involving tangible personal property, whereas intangible assets like stock or LLC equity are exempt. This rule holds true everywhere, except possibly in New York.
The Deal:
Consider a New York-based buyer specializing in online business and investment information through subscription products. In 2012, their interest was piqued by a New York media company. This company offered insightful coverage of mergers and acquisitions, primarily via digital information services. Their products reached audiences via print, online, and in-person platforms.
Initially, the buyer sought to buy the company’s assets, but the company proposed selling its equity. This target operated as a single-member LLC, classified as a disregarded entity for federal and state income tax purposes.
On September 11, 2012, the buyer acquired all the target’s membership interests for $5.8 million according to the “Equity Interest Purchase Agreement.” The target continued its operations as a single-member LLC, retaining its disregarded entity tax status.
Tax Controversy:
In 2014, New York’s Taxation Division conducted a sales tax audit for both the buyer and the target. Based on this audit, New York demanded a $125,000 sales tax payment for the target’s tangible personal property. The buyer protested, insisting they had bought equity, not assets.
The disagreement reached an Administrative Law Judge within New York’s Tax Appeals Division. Following a hearing, the judge upheld the $125,000 sales tax assessment, arguing that the transaction amounted to an asset acquisition. The judge pointed out the purchase agreement’s allocation of the purchase price and how the buyer combined the target’s assets on its financial statements.
This case is referred to as In the Matter of the Petition of Thestreet.Com, Inc. (a/k/a The Streete, Inc.) DTA NO. 828467, State of New York, Division of Tax Appeals, (February 4, 2021); https://www.dta.ny.gov/pdf/determinations/828467.det.pdf
Comment:
However, it seems this decision might be flawed. The auditor and judge relied on details that don’t definitively prove the target sold its assets. The stipulated purchase price allocation, for instance, didn’t transform an equity purchase into an asset acquisition. This was used mainly due to the target’s disregarded entity status for federal and state income tax purposes. This means, for income tax purposes, the transaction appeared as an asset sale, not as an equity sale by the target’s owner.
While New York could have passed a law expanding the disregarded entity concept beyond income tax to sales and use tax, such a law isn’t mentioned in the judge’s decision.
Additionally, New York seized upon the fact that the target’s assets were included in the buyer’s post-closing balance sheet. Whether this aligns with generally accepted accounting principles is uncertain, but it doesn’t fundamentally change an equity acquisition into an asset acquisition.
By John McCauley: I help people manage M&A legal risks.
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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