New York Trying to Impose Sales Tax on Acquisition of Equity of LLC

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Buyer acquires all equity of the target, an LLC, and a disregarded entity. NY Division of Tax Appeals upholds NY’s $125K sales tax assessment on target’s tangible personal property.

M&A Stories

February 26, 2021

Introduction

M&A lawyers know that there will be no sales tax in a stock acquisition because sales tax only applies to an asset acquisition, the acquisition of tangible personal property. Why? Because sales and use tax only applies to the sale of tangible personal property, and stock is intangible personal property. Same when buying the equity (that is membership interests) in a limited liability company. LLC membership interests are also intangible property. But maybe not in New York.

The deal

The New York based buyer, provides online business and investment information to its customers through numerous subscription products.

It became interested in acquiring a New York based target in 2012. The target is a media company that publishes sophisticated coverage of the mergers and acquisitions environment, primarily through a leading digital provider of transactional information services.  The target provides its products and services through print, online, and in-person platforms.

The buyer offered to purchase the target’s assets. The target countered with an offer to sell its equity. The target was a single member limited liability company and a disregarded entity for federal and state income tax purposes.

On September 11, 2012, the buyer purchased all of the target’s membership interests from the seller for $5.8 million, pursuant to the terms of an “Equity Interest Purchase Agreement”. The target continued business operations after the closing as a single member LLC and as a disregarded entity for federal and state income taxation purposes.

The tax controversy

New York’s Division of Taxation performed a sales tax audit of buyer and target in 2014. Based upon the audit New York proposed a $125K sales tax assessment on the target’s tangible personal property. The taxpayer, to no avail, protested that it purchased the target’s equity not the target’s assets.

The dispute ended up before an administrative law judge of New York’s Division of Tax Appeals. After a hearing the Administrative Law Judge upheld the $125K sales tax assessment.

The judge said that the transaction was an acquisition of assets. It pointed to the fact that there was an allocation of purchase price in the purchase agreement, and that the buyer commingled the target assets on its balance sheet.

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

This decision can’t be right. The auditor and administrative law judge were persuaded by facts that do not establish that the target sold its assets to the buyer.

The purchase agreement’s requirement for a purchase price allocation did not change this equity acquisition into an asset acquisition. It was used because the target was a disregarded entity for federal and state income tax purposes and thus (for federal and state income tax purposes) the deal was a sale of assets by the target to the buyer and not a sale of the target equity by the target’s owner to the buyer.

New York could have passed a law saying that a disregarded entity in New York is disregarded not only for New York income taxes but also New York sales and use tax. No such law was mentioned in the administrative law judge’s decision.

The other fact that New York latched on to was that the target assets were included in the buyer’s balance sheet, post-closing. I don’t know if post-closing commingling target assets on the buyer’s balance sheet is consistent with generally accepted accounting principles, but that does not convert an equity acquisition into a 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 

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