Explore a legal blog post discussing a significant M&A case where a buyer faced unexpected challenges over sales tax responsibility in a marina asset purchase agreement. Learn how precise contract language and allocation provisions could have averted the dispute. Case reference: Gaines Mar. & Servs., Inc. v. CMS Mar. Stor., LLC.
November 7, 2019
Introduction:
In the world of mergers and acquisitions (M&A), the wording of agreements holds significant weight. When conflicts arise after a deal is closed, legal professionals and judges turn to the precise language in the M&A documents to find resolutions. However, sometimes this language can lead to unexpected outcomes for the parties involved.
The Scenario:
This case centers around the purchase of marina assets worth $6 million. This transaction attracted a substantial sales tax obligation. The asset purchase agreement contained a provision stating that the seller would be responsible for the sales tax on the seller resulting from the marina’s sale.
The Legal Dispute:
Surprisingly, the sales tax amount reached $91,000, and the seller refused to cover this cost. The disagreement escalated to the New York state trial court and later to an intermediate court of appeal. Both courts determined that, according to state law, the sales tax was on the buyer and not the seller. Consequently, the provision in the asset purchase agreement did not apply, as the seller had only promised to be responsible for a sales tax imposed on the seller.
Key Point:
To avert such situations, it would have been prudent for the buyer to suggest an allocation provision within the agreement. Such a provision could have stated that any sales tax linked to the transactions outlined in the asset purchase agreement would be the seller’s responsibility. This way, the debate over whether the state’s sales tax obligation lies with the buyer or the seller could have been sidestepped.
Case Reference:
This case is referred to as Gaines Mar. & Servs., Inc. v. CMS Mar. Stor., LLC, 528195, Appellate Division of the Supreme Court of New York, Third Department (Decided October 31, 2019)
By John McCauley: I help people manage their tax risks when buying and selling a business.
Email: jmccauley@mk-law.com
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