[Following is the final of a 3-part series on Amnesty by Peisner Johnson's Michael Fleming]

If we compare the charts of the pros and cons of both amnesty programs and VDAs you will find that the VDA programs come out ahead in having both more pros and fewer cons. It is important to remember though that we have been talking in generalities. While we believe that in many instances the VDA is the better choice, each situation should be examined on an individual basis and all possible solutions should be explored to determine the best possible outcome. Sometimes the solution may require a third approach as is the case with New Mexico. New Mexico’s amnesty program expired last year and, as of now, they have no VDA program. Prior to their amnesty program beginning and after its expiration we have been very successful negotiating with the state to help companies solve their tax issues. Or maybe your best solution requires a multi-pronged approach.

Above all else, I believe there are eight important points to take away from this article:
 
1. Know which states offer amnesty programs. There are a large number of states who have recently completed general amnesty programs or in the case of Washington and Michigan will soon be completing them. (WA runs from 2/1/11-4/18/2011 and MI runs from 5/15/2011-6/30/2011.)

2. Expect increased audit activity. Keep in mind that all states are stepping up enforcement actions but states that have completed amnesties can be expected to be especially aggressive; as evidenced by the Pennsylvania Revenue Secretary’s comment about stepping up enforcement actions as well as actually coming after corporate officers.

3. Be proactive. Do not let the states find you first. As you can see from the comparison the one negative that both programs have in common is that neither is usually available once the state has found you. Look into the possibility you may have exposure.

4. Don’t be complacent. Just because you believe you don’t have issues does not make it true. Of the myriad horror stories I hear, many could have been prevented by performing routine checkups. Review your operations. Has anything changed about where or how you do business, perform services or deliver your products? Keep abreast of changing nexus definitions or interpretations. Maybe your business has stayed the same but the state has changed their nexus interpretations. Educate yourself.

5. Don’t assume that your employees or CPAs can stay on top of every little nexus change for you. While some of them may be on top of these issues, it is usually not necessarily “top-of-mind”. They have daily tasks and duties that keep them busy. For many CPAs, federal taxes are the main concern, and well they should be. CPAs are usually very much on top of what’s happening in their own states, but every state is different, and many simply don’t have the resources required to stay on top of the multitude of ever changing multiple state tax issues.

6. Don’t just “get registered.” Never try to just register in a state where you believe you may have the potential for exposure. You can open yourself up to a whole host of negatives and will probably not be able to take advantage of either a VDA or amnesty.

7. Don’t forget about Canada. Canada does not appear to be as aggressive as some states in the US, but you may still have potential issues there. Revenue Canada as well as the non-member provinces all offer VDA programs. (We can help.)

8. Don’t be afraid to ask for help or to ask questions. No matter what your position, be it the boss, employee, or advisor to the company, the question you ask may save everyone a whole lot of trouble. The question may be internal or it may go to one of the handful of specialized firms throughout the country.

There are currently so many differences in the state VDA and Amnesty programs it is hard to cover them in detail in a single article like this. It was my intention to provide you with as much general information as I could. If you have any questions or would like additional information, including a list of states that have completed general Amnesty programs, please let me know. I can be reached at 800-940-9433 ext. 720 or by email at mfleming@peisnerjohnson.com.

Arkansas Enacts Amazon.com Nexus Law!

The Governor of Arkansas has signed an “affiliate nexus” law and “click-through nexus” (or Amazon.com nexus) law into effect as of April 1, 2011 (SB738).  The laws take effect 90 days after enactment.

Affiliate Nexus Law

Under the Affiliate Nexus law, a seller is presumed to be engaged in the business of selling tangible personal property or taxable services for use in the state if an affiliated person is subject to the sales and use tax jurisdiction of the state and the:

1. Seller sells a similar line of products as the affiliated person and sells the products under the same business name or a similar business name; 
2. Affiliated person uses its in-state employees or in-state facilities to advertise, promote, or facilitate sales by the seller to consumers; 
3. Affiliated person maintains an office, distribution facility, warehouse or storage place, or similar place of business to facilitate the delivery of property or services sold by the seller to the seller’s business;
4. Affiliated person uses trademarks, service marks, or trade names in the state that are the same or substantially similar to those used by the seller; or
5. Affiliated person delivers, installs, assembles, or performs maintenance services for the seller’s purchasers within the state.

Opportunity to Rebut Presumption

The presumption may be rebutted by demonstrating that the affiliated person’s activities in the state are not significantly associated with the seller’s ability to establish or maintain a market in the state for the seller’s sales.

“Click-Through Nexus” Law

If there is not an affiliated person with respect to a seller in the state, the seller is presumed to be engaged in the business of selling tangible personal property or taxable services for use in the state if the seller enters into an agreement with one or more residents of the state under which the residents, for a commission or other consideration, directly or indirectly refer potential purchasers, whether by a link on an Internet website or otherwise, to the seller.

$10,000 Sales Threshold

However, this nexus presumption only applies if the cumulative gross receipts from sales by the seller to purchasers in the state who are referred to the seller by all residents with an agreement with the seller exceed ten thousand dollars ($10,000) during the preceding twelve (12) months.

Opportunity to Rebut Presumption

The presumption may be rebutted by submitting proof that the residents with whom the seller has an agreement did not engage in any activity within the state that was significantly associated with the seller’s ability to establish or maintain the seller’s market in the state during the preceding twelve (12) months.

Proof may consist of written statements from all of the residents with whom the seller has an agreement stating that they did not engage in any solicitation in the state on behalf of the seller during the preceding year if the statements were provided and obtained in good faith.

Act 1001 (S.B. 738), Laws 2011, effective 90 days after adjournment of the 2011 Legislature, and as noted

In my first post on mergers, we explored the types of transactions you might consider and the good and bad reasons to consider a business combination.  In this blog, we’ll discuss how to get started in your pursuit of a merger or acquisition partner.

First, your leadership team must agree on the benefits you’re seeking from the combination (see my last post for a potential benefits list).  Ideally, these will be the specific objectives you most want to accomplish from the merger or acquisition or what will be different or better (and how) once the combination is complete.

Then, you’ll develop agreed-upon qualifying criteria to identify your list of potential integration partners.  Initial criteria to define include your potential suitors’ ideal or desired:

• Size – in revenues, employees, locations, and market reach.  If you’ve decided to merge your firm upstream, you’ll be looking for a suitor larger than you.  A merger of equals and acquisitions of smaller practices or individual books of business dictate the appropriate size considerations, too.
• Location(s) – what area do you want or need their main location (or corporate headquarters) to be?  What other locations are you seeking (if applicable)?  Define the geographic profile that you feel will mesh with your firm’s growth plan and reasons for undertaking a transaction.
• Leadership and ownership structure – what type of leadership or ownership structure do you feel will best meet your intention for merging?  For instance, if your firm is seeking a merger as a succession strategy for an aging owner group, you’ll want to seek merger candidates with younger owners and leaders.  If your firm is seeking a smaller, simpler acquisition, you’ll want to seek firms with a smaller number of partners or shareholders.
• Product/service mix – if you’re looking to acquire talent to start up a particular niche or service area, then that will dictate the product/service mix that potential partners must offer to make your target list.  If your strategy is to add more capacity to your current service areas, you’ll want to identify firms whose services virtually mirror your own. 

Then, assign a team member to use your initial criteria to conduct research and identify firms in your chosen geography and of the size, leadership and ownership structure and offering the product/service mix that fit your criteria.  You can find these firms by:

• Conducting web-based research using key words from your initial criteria and then carefully reading web pages, LinkedIn profiles, and other web references to find firms that meet your requirements.
• Letting your trusted referral partners, fellow alliance members, association contacts, consultants, and other key service providers or vendors know of your firm’s intentions and the details of your target profile so that that they can suggest or refer candidates to you.
• Looking at competitors you’ve respected in the past that you feel may meet your initial criteria.
• Using firm lists produced by accounting trade publications or the state society in your target geography to identify potential firms.

These sources will help you develop a first round list of potentials.  Ideally, you’ll gather information about each potential partner by reading their web site, social media sites, filings, association affiliations, and press releases.  Organize this data into a grid where the prospective suitors are placed as columns and the data you garner about each from your research populates the rows – with a row for each of your qualifying criteria and other rows for other pertinent information you may discover in your first-round research (like their mission statement, values, names and number of partners, niches, and more).

Once you have your “potential targets” matrix populated, gather your firm’s M&A team (which may be a small group) to review and discuss each firm.  This process is likely to shed additional anecdotal information on the candidates and may cause you to eliminate or add some based on reputation or other feedback you receive. 

During this meeting, you should agree on who from your firm will serve as the point person to reach out to the remaining potential targets to explore their interest in integrating with your firm.  This should typically be a high level contact on your side (CEO, Managing Partner, or practice leader) reaching to a senior decision maker on their side to meet for a meal and talk about growth strategies and their interest in a potential combination of the type your firm is envisioning. 

With luck, these outreach activities will generate a few interested potentials to begin deeper discussions in earnest.   In my next blog, we’ll discuss qualifying criteria to evaluate as you pursue a serious M&A candidate.  In the meantime, if you have any ideas about identifying a list of M&A pursuit potentials or any other thoughts on the subject of merging, please share them with us.  We’re interested!

Jennifer Wilson is a partner and co-founder of ConvergenceCoaching, LLC, a leadership and marketing consulting and coaching firm that specializes in helping CPA and IT firms achieve success.  Learn more about the company and its services at www.convergencecoaching.com.

[Following is Part 2 of a 3-part series on Amnesty by Peisner Johnson's Michael Fleming]

Voluntary Disclosure Agreement (VDA) Programs
As mentioned earlier VDA programs are similar to amnesty programs. You can think of VDA programs as a sort of on-going amnesty. Both programs usually allow for at least the waiver of penalties and sometimes some or all of the interest. The differences between the two lie in the additional benefits and flexibility offered by VDAs. Let’s compare and contrast.

One of the great differences between the two programs is that most VDA programs offer a limited look back period. The look back period is usually 3-4 years. However there are a few states, with Hawaii being an example, with look back periods as long as 10 years. The importance of a limited look back period is paramount.  If you have never registered in a state, then there is no statute of limitations on how far back a state can pursue you. If you have been doing business in a state for 20 years, then, at least theoretically, if not in actuality, a state has the right to pursue you for those 20 years. In actuality, states do routinely go back 7 years.  Add up those back taxes interest and penalties and the numbers mount quickly. Additionally many states share this type of information when they find delinquent taxpayers in these situations; so you may soon find yourself being pursued by multiple states and your problems compounding.

This is usually an apocalyptic scenario for a company because, like amnesty programs, VDA’s are usually available only to participants who are not currently reporting or those with outstanding liabilities that have not been identified by the taxing agency. (If you find yourself in such a dire situation, it would be in your best interest to call us immediately.) In order to prevent this type of scenario from happening most states allow for VDA’s to be initiated by third parties on an anonymous basis. A taxpayer’s name is not disclosed until an agreement on the terms of the VDA is reached. A successful VDA strategy takes this into consideration and provides for a multi-state approach wherever a taxpayer has nexus but is not filing.

Another instance where the anonymous feature of a VDA comes in handy is in the potential avoidance of possible civil or criminal prosecution. In many instances the waiver of civil or criminal prosecution is addressed in the VDA agreement prior to the taxpayer’s identity being disclosed.  Both programs are vehicles to bring a company into compliance.

Most states offer VDA programs covering a wide variety of taxes. Although not highly publicized, the programs are ongoing and can be taken advantage of at any time, unlike amnesty programs which have short windows of opportunity and are offered at long, irregular intervals. This is an added benefit when dealing with multi-state issues. VDA’s also do not usually require the waiving of rights to an appeal or refund and usually do not have provisions for harsh penalties.

The following is a brief listing of the pros and cons of VDA Programs.
 
Pros     
1. Vehicle for compliance.   
2. Avoidance of possible prosecution.      
3. Usually offer a waiver of penalties.      
4. Potential waiver of some or all interest.      
5. Limitation of look-back period.      
6. Anonymity feature.      
7. Easy to coordinate multi-state efforts.      
8. Available most of the time.      
9. No harsh penalties.      
10. Usually no waiver of rights.      

Cons 
1. Available only if not already identified by state.

[Following is Part 1 of a 3-part series  on Amnesty by Peisner Johnson's Michael Fleming]

Tax Amnesty programs wax and wane in popularity depending on economic conditions. Recently with the depressed economy, Amnesty Programs seem to be all the rage. State and local jurisdictions have been announcing them at a rapid pace with some jurisdictions, like the city of Philadelphia offering one for the first time in 19 years and the state of WA offering the program apparently for the first time ever. The programs usually have short windows of opportunity and require quick action in order to take advantage of the benefits. Many states increase the sense of urgency by threatening increased enforcement actions once the amnesty period ends. A prime example is Pennsylvania, who’s Revenue Secretary, C. Daniel Hassell said, “Before Tax Amnesty ended, we promised to step up enforcement efforts against anyone who did not take advantage … Now we’re delivering on a second promise, to hold corporate officers personally accountable for taxes their businesses owe.”  It is statements like this that have caused many taxpayers who were not able to meet amnesty deadlines to worry that the states will soon be knocking at their door. If you are one of these taxpayers your worries may be over. You may be able to do a Voluntary Disclosure Agreement (VDA) and actually be better off then if you completed the amnesty. 

There are many similarities between VDAs and Amnesty Programs, however before we begin to compare and contrast the programs, let’s explore why a state (local jurisdiction can be substituted for state from this point forward) would offer programs like these. After all, if the states are looking for ways to increase revenues, why give taxpayers a financial break? At first glance it may not make sense, but after reviewing some of the reasoning you’ll hopefully see why it makes perfect sense. Here are three points.

1. Best use of limited resources. State tax departments, just like company tax departments, are being asked to do more with less. Tax officials, who are being tasked with bringing more revenue into state coffers, have to choose where to devote their time and enforcement efforts. If companies step forward on their own, the time and resources that would have been spent finding those companies can now be targeted elsewhere. Simply put, they now have more time and resources to devote to you.  
2. New found cash. When a company voluntarily steps forward the state receives a lump-sum cash infusion consisting of numerous years of back taxes and some interest and/or penalty. This money flowing in through VDAs or rushing in through Amnesty is basically a windfall to the state.    
3. New streams of cash going forward. Not only does the state receive a lump sum for the back years when a company becomes compliant and pays the money it owes, but it now has a taxpayer that will likely continue to pay taxes on a going-forward basis.
Hopefully these points have shed some light on why a state would offer programs like these. Now the question is why companies would want to participate in these programs. Well, in order to convince companies to participate, the states offer enticements. Those enticements can include a waiving or reduction of the penalties and or interest as well as possibly limiting the look-back period. These enticements can add up to big money often totaling into the tens or hundreds of thousands and even millions of dollars. Taking advantage of these programs can sometimes make the difference between the life and death of a company. By becoming compliant there is also the possible added benefit of escaping the possibility of civil and or criminal prosecution. 

Now that we know these programs are a win for the states as well as the taxpayer, you may be asking; what’s the difference between the two programs and which one is best for me. In order to answer this question let’s quickly look at the general characteristics of both VDAs  and Amnesty programs.  I say general characteristics because each state has its own twist on each of these programs and to cover the details of each program in each state would be too much to cover in one article. (If you have specific question about individual state programs please contact me.)

“Amnesty” Programs

The first thing to realize when talking about state tax amnesty programs is that they are generally not true amnesties. I say “true amnesties” because you don’t get out of the tax completely. They require you to at least pay back taxes. Some states offer a limited look-back period but the majority require all outstanding periods to be paid. In short, the look-back period is usually not limited. In addition to back taxes you may be required to pay either some interest and/or penalty. Some states will waive the entire penalty. Others will waive the penalty and a percentage of interest and a few the entire penalty and interest. Whatever the mixture turns out to be in a given state, you will be paying something in virtually all instances. (There is one exception for true amnesties, covering the states of Georgia, Ohio, Utah and Tennessee, where a seller’s uncollected sales tax, penalty and interest are all waived. However this is a complicated situation that can be explained in more detail by contacting us or by reviewing the article written by Andrew  Johnson, founding partner of Peisner Johnson & Company, titled “Are You For or Against Amnesty?”

In addition to saving money, an amnesty program is a great vehicle to become compliant and is a step towards the possible avoidance of possible civil or criminal prosecution. Amnesty programs usually cover a wide range of taxes, are generally well publicized and run for specific period of time. The specific period of time is short, ranging from 30 days to 6 months, with the majority trending toward the lower end of the range. Amnesty programs are not offered on a regular basis or with any frequency. They are usually available only to participants who are not currently reporting or those with outstanding liabilities that have not been identified by the taxing agency. Participants are often required to waive their rights to an appeal or a refund of any monies paid under the amnesty. Sometimes, there can be harsh penalties for any taxes that could have been paid under the amnesty but were not. Amnesty is public and usually leaves a company open to greater scrutiny by other states. Amnesty is almost always followed with periods of increased enforcement against those who have not taken advantage of the amnesty.

Amnesty Pros & Cons

Pros                                   
1. Vehicle for compliance. 
2. Avoidance of possible prosecution. 
3. Usually offer a waiver of penalties. 
4. Potential waiver of some or all interest. 

Cons
1. Usually no limitation on look-back period.
2. Short window of opportunity to act.
3. No predetermined frequency of offering.
4. Available only if not already identified by state.
5. Waiver of rights to an appeal or refund.
6. Possible harsh penalties for not taking full advantage.
7. Increased visibility by other jurisdictions.

[Part 2 in this series will look in-depth at Voluntary Disclosure Agreements]

In the current economic environment, states have a tightrope to walk between balancing the need to increase revenues with the need to save and create jobs. The state of Washington probably thinks it has found a creative way to do both.

Prior to June 1, 2010 many of WA’s in-state companies that provided services were at a competitive disadvantage to out of state companies. In instituting an economic nexus standard in addition to changing the apportionment method for certain companies to “single factor receipts apportionment” WA has leveled the playing field. In fact, many WA companies with out of state sales will see their taxes go down, some substantially.

On the other hand, out-of-state companies who have never worried about the Business and Occupation Tax (B & O) before will now be subject to the WA tax, even if they don’t have a physical presence. Common sense tells us that WA will look at ways to not only make up for the tax relief they have provided their domestic companies, but also to bring in the additional revenues all states are looking for. Increased enforcement of both the B & O and the sales and use tax are two of the most logical ways to do this. Out-of-state companies who are not paying the B & O seem to be likely (and lucrative) targets. The current amnesty program is a useful tool that many taxpayers may or may not take advantage of for a multitude of reasons.

However, if you currently provide a service in WA or receive a royalty out of WA and are not paying the B & O, this may be your best opportunity to become compliant as well as avoid all the penalties and interest.

Before we take a look at amnesty, let’s explore the B & O, economic nexus and the ramifications of single factor receipts (sales) apportionment.

Focus on B & O

Washington does not have an income tax and instead uses the B & O which is a gross receipts tax. A gross receipts tax is different from an income tax in that it is not levied on profits but instead on the total revenue of all goods and services. Since we are talking about gross income there are no deductions from the B&O tax for labor, materials, taxes, or other costs of doing business. The tax rate is different depending on the classification of your business.

What is Washington’s Economic Nexus?

Washington’s economic nexus, which became effective on June 1, 2010, is applicable only to income that would be taxable under one of the “apportionable” classifications. In addition to the “catch-all” category of “Service and Other Activities”, WA is now including the following:
 
• Real estate brokers
• Nonprofits engaging in R&D
• Travel agents and tour operators
• International steamship agents, international customs house brokers, etc.
• Stevedoring and associated activities
• Low-level waste disposal
• Insurance producers, title insurance agents, and surplus line brokers
• Hospitals
• Inspecting, labeling, and storing canned salmon
• Independent resident managing general fire or casualty insurance agents
• Contests of chance and horse races
• International investment management services
• Aerospace product development for hire
• Royalties from granting intangible rights
• Boarding home room and domiciliary care
• Certain radioactive waste cleanup activities
• Newspaper and printer/publisher advertising
 
If your income attributable to WA is derived from one of these apportionable classifications the need for a physical presence is eliminated and you are subject to the economic nexus thresholds. The thresholds, based on a calendar year, for businesses outside of WA are:

• More than $50,000 of payroll in Washington
• More than $50,000 of property in Washington
• More than $250,000 of gross income in Washington
• At least 25 percent of your total property, payroll, or income in Washington

If you meet any one of the above minimum thresholds, then according to WA, you have economic nexus; no physical presence is needed. As such, you would be required to register your business with the Washington State Department of Revenue and report and pay Washington B&O tax. (If you need help determining if you have Nexus or need help registering contact us.)

What is apportionment and why is the change to a single factor receipts (sales) method important?

Apportionment can be defined as the method by which a taxpayer divides its income among the states in which they have established nexus due to their specific business operations within each state. It is expressed as a ratio and is often referred to as a formula. Historically, WA has used a cost apportionment formula; however in 2000 they added a three factor apportionment formula for financial institutions. The single factor receipts apportionment formula will replace both of those existing formulas.

To keep things simple we will forgo how the ratios are structured and instead concentrate on the benefits. (Contact us for more detail on ratios.) The biggest benefit of the change by far is the ability of in-state companies to attribute apportionable income to the state where the benefit is received rather then where the costs were incurred. This is a tremendous opportunity for in-state service providers. Some of our clients have been able to reduce their tax burden in excess of 50%. If you are in a service business with customers outside WA, we suggest you reexamine how you are calculating your B & O obligations.

Right now there is a lot of confusion as to what you can exclude from your formula due to some awkward wording on the WA DOR website. Many CPA’s have contacted us for guidance in how to best position their clients. Based on what we see, many taxpayers are still not correctly applying the new method, thereby overpaying their taxes and creating an ever growing refund opportunity. If you would like us to review your process or would like see if you have a potential refund let us know.

Is the WA amnesty a good deal?

In general we usually prefer Voluntary Disclosure Agreements (VDAs) over amnesty programs. Our reasons are outlined in our previous article, “You Missed the Tax Amnesty Express. Don’t Worry. You are probably better off with a VDA anyway!” However, as Tax amnesties go this is a worthy program. It began on February 1, 2011 and runs through April 30, 2011. Don’t let that April 30th date confuse you though. That is the date by which all taxes must be paid. The real cutoff date is April 18, 2011 which is the date by which you must submit an application and file all outstanding or amended returns.

The amnesty is good for the following taxes:
 
• State business and occupation (B&O) tax,
• State public utility tax,
• State and local sales and use tax including:
• General retail sales and use taxes
• Rental car taxes
• King County food and beverage tax
• Additional sales and use tax on motor vehicle sales/leases
• Lodging taxes, but not including tourism promotion area lodging charges
• Brokered natural gas use tax
 
The amnesty program waives penalties and interest as well as limits the look back period to 4 years plus the current. However, in order to take advantage of the amnesty, you must waive your right to a refund or an appeal of any taxes paid under the amnesty. This is an amnesty program that may be worth your time and effort; however it may or may not be in your best interests. We suggest you examine all the alternatives and weigh them against your particular set of circumstances. If you would like help with this process let us know. The most important item to remember is that if you have exposure, act now. States make it a practice to substantially step up enforcement actions after an amnesty and they are usually not in a forgiving mood. Add this to the fact that they already needed to make up the revenue lost on the breaks being given to domestic service companies and the numbers start to stack up against you.

In summary, there are a great many changes happening in Washington. Depending on your circumstances they may have positive implications or negative implications. The bottom line is if you are selling in or into Washington, or have clients doing either, you need to keep abreast of what’s going on. I don’t know if the breaks for the domestic service companies will create more jobs, but I do know that the changes will keep accounting professionals of all types very busy.

In order to help you stay current on specific state events, Peisner Johnson & Company will be offering a series of free one hour state specific webinars that provides for CPE credit. The first in the series will be the state of WA. It will be held on Tuesday, March 29th at 1:00 PDT. To register click here or for more information contact Mike Fleming at 800-940-9433 ext. 720.

“… what is the criteria to determine the success of any merger? It would have to be that the companies are stronger financially, that they took market share, and they are on a very steady footing in terms of their performance.”
        Kevin Rollins, Former President at Dell

Merger “mania” seems to be taking hold in the accounting profession.  According to a November 2010 Journal of Accountancy article by Joel Sinkin and Terrence Putney, CPA, “…leaders in the profession believed there would be more mergers and acquisitions in the 10-year period from 2007 to 2017 than in the entire prior 100-year-plus history of the accounting profession in the U.S.  The activity since 2007 has proven this assessment to be accurate.”

So, should your firm consider merging?  In this blog, we’ll explore the types of transactions that you might consider and also identify some of the good and bad reasons that may drive you to consider a business combination.  In future blogs, we’ll explore things to consider when evaluating potential merger or acquisition targets and what to envision in the post-merger period called “integration.”

There are a number of business combinations you can consider, including:
• Merging your firm “upstream” into a larger firm
• Merging with a firm your size, which is referred to as a “merger of equals”
• Merging a smaller firm or an individual practice into your firm
• Acquiring an individual practice where the clients come over, but the practitioner does not

Motivators for a merger or acquisition (M&A) strategy are many, and they are not all healthy.  From my perspective, good reasons to consider a business combination include the desire to:

• Join a larger, more established firm to leverage their brand, infrastructure, marketing savvy and potential to invest in your growth
• Enter a new geography, new service or industry niche or diversify your firm’s services in some way
• Add more value to clients by partnering with another firm that has services you can swiftly add to your portfolio and benefit your clients
• Layer in additional clients and/or service delivery personnel who reinforce your firm’s existing product/service mix and will integrate well with your people
• Grow rapidly to remain competitive with other competitors who are gaining girth through their own M&A strategy
• Find a home for clients and/or staff who will need leadership and infrastructure as you and/or your partners retire (due to lack of a true answer to your succession)

On the flip side, negative reasons for considering a merger, which often lead to a failure to find a suitor, consummate a deal or enjoy a successful post-merger integration, include the hope of:

• Finding a buyer who will come in and rescue your firm from poor financial performance, an unprofitable lease or other facilities issues.  If this is your situation, expect a low valuation or first get your financial house in order before seeking a match
• Merging with a firm with leadership who will straighten out partner behavior or performance issues that you haven’t been able to resolve.  In this case, most firms will shy away from dysfunctional leadership teams unless the deal involves removing the cause of the issues.  I recommend that you resolve your unity and behavioral issues before finding a suitor
• Integrating with a firm to find a home for a weak team of successors.  Most firms are interested in acquiring only the strongest talent in this market, where many are still seeking clients and projects to fill their own capacity.  If your team members are not of the caliber that another firm would hire them if they applied directly, be prepared to consider a transaction that involves transferring clients and downsizing the team to eliminate the weaker players as part of the transaction

There can certainly be exceptions to these, where a firm will see something of strategic value in your firm despite these issues, however, the rule I’d like you to consider is that it’s hard to move or sell your yet-unresolved problem at a valuation or deal structure that you’re going to be happy with.

If your leadership team has decided that an M&A strategy is important to your firm achieving its future vision, stay tuned for my next post where we’ll explore ways to find the right integration partner and how to prepare for conducting and enduring the due diligence process.

Jennifer Wilson is a partner and co-founder of ConvergenceCoaching, LLC, a leadership and marketing consulting and coaching firm that specializes in helping CPA and IT firms achieve success.  Learn more about the company and its services at www.convergencecoaching.com.

The L.A. Times reported this week on Assemblywoman Nancy Skinner’s bill that seeks to impose sales tax on merchandise sold online. Skinner’s AB 153 is another Main Street Fairness bill that aims to create a level playing field and help brick and mortar businesses regain their balance when competing against e-tailers not currently charging sales tax.

The story details the inevitable bid by California legislators to claim what is surely the lowest-hanging fruit in the face of a $25 billion budget gap:

“The state has long had a back-up tax. A 35-year-old statute requires both businesses and individuals to pay a use tax on purchases when sales taxes aren’t collected. While businesses have shown spotty compliance, individuals almost universally ignore the use tax, experts said.”

The Times asserts that, as the Democrats control both houses of the California Legislature, Skinner’s bill will likely pass, joining states like New York, North Carolina, and Rhode Island in opening up a major new source of revenue.

“Bundled Transactions” - Who Cares?

“Bundled transactions,” or “mixed-transactions” as they are sometimes called, is when a business sells items that are taxable with items that are non-taxable (from a sales tax perspective).  When a company sells taxable and non-taxable items together and does not separately state them on the invoice, but “bundles” them together, what happens?  How is the transaction or invoice taxed? 

Separately State (Unbundle)?

In most states, when a taxable item is bundled together with a non-taxable item, the whole transaction becomes taxable.  Ouch!  If you didn’t know that, you need to take action now to “unbundle” your transactions and only charge tax on the taxable items.  This is general guidance.  You should consult the state’s laws for the state in which your transaction takes place to reach a final conclusion, as each state is different. 

Impacts Services and Tangible Personal Property

This not only impacts sales of tangible personal property, but also services.  You could have a taxable service bundled with a non-taxable service.  You could also have taxable tangible personal property bundled with a non-taxable service. 

So What?

Don’t wait until the auditor arrives to review your transactions and correct this.  Act now and mitigate your exposure.

Michael Cohn of Accounting Today reported this week on North Carolina’s Department of Revenue pulling back from an attempt to force Amazon.com and other online retailers to turn over data related to customers’ purchases. The ACLU has asserted that customers’ First Amendment rights would potentially be violated if online retailers complied with North Carolina DOR’s request.

Cohn quotes Jennifer Rudinger, executive director of the ACLU of North Carolina, who asserts:

 “The NC Department of Revenue does not need access to private customer records that reveal which specific customers in North Carolina have ordered which specific books, music or movies in order to complete its audit of Amazon and collect any taxes owed.”

Cohn’s article also discusses North Carolina DOR getting pushback, in the form of a lawsuit filed by travel-related website companies (Orbitz, Travelocity, Hotels.com), “claiming that recent amendments to North Carolina’s sales tax laws that took effect on Jan. 1 are unconstitutional and constitute a violation of the Internet Tax Freedom Act.  The amendments require that the fees paid to the travel sites for hotel room bookings be included in the gross receipts of the hotels and thus subject to sales and hotel taxes.”

Read the complete text of Cohn’s article here.