The language used in an M&A deal matters. In a post-closing dispute, the lawyers and judges look to the language of the M&A document to resolve the dispute. And sometimes, the language will work against what a party thought.
This case involved a $6 million purchase of the assets of a marina. The sale of the marina assets was going to generate a significant sales tax. There was language in the asset purchase agreement that said that the sales tax of the seller from the sale of the marina would be the responsibility of the seller.
The sales tax turned out to be $91K and the seller refused to pay for it. The dispute ended up in a New York state trial court and then an intermediate court of appeal. Both courts said that the New York sales tax is imposed by statute on the buyer not the seller. Therefore, the provision in the asset purchase agreement did not come into play because this sales tax was not a sales tax “of the seller.” It was a sales tax of the buyer. The buyer was stuck with it.
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)
The buyer should have proposed a sales tax allocation provision that said that any sales tax arising out of the transactions contemplated by the asset purchase agreement would be the responsibility of the seller. Then you don’t have to get into whether the state’s sales tax is the obligation of the seller or the buyer.
By John McCauley: I help people manage their tax risks when buying and selling a business.
Telephone: 714 273-6291
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