Episode 31: A Look at State & Local Tax M&A

Transcript

IRIS LAWS

On this episode, we look at M&A from a bit of a different lens; state and local tax. If you're considering a transaction, this is a great one to listen to as we welcome Tom Yonchak from the firm's Transaction Advisory practice. From your one stop for tax updates and analysis, I'm Iris.

DEVIN TENNEY

And I'm Devin.

IRIS LAWS

It's Tuesday, July 28, and this is “Tackling Tax.”

I am so excited today to welcome someone that I've known I think literally my whole career. Tom Yonchak is here, who is our SALT M&A guru. And yes, for the purposes of this conversation, SALT means State and Local Tax. So, just getting that out of the way. But a little about Tom. Tom is a graduate of the University of Georgia and has a Master of Accounting from Clemson University.

Tom is a managing director at Forvis Mazars and has 20 years of state and local tax experience with a specialty in SALT M&A. So, that being said, before we dig into maybe some technical discussion, Tom, tell us more about you and how you landed in this role.

TOM YONCHAK

Yeah, great to be here with you guys. Thanks for having me. So, I've been out of school 20 years practicing in public accounting, and I would say most of that's been a state and local tax focus. Obviously started my career doing more consulting work, nexus studies, compliance reviews, VDA-type work. And that morphed into M&A a little over 10 years ago.

And we got asked by our transactions group to assist on a few deals. And each year that multiplied to a lot more. And then finally, just shy of 10 years ago, I kind of switched over and did SALT M&A on a full-time basis. So, it keeps us busy and certainly I love just the different industries we touch. And every deal is so different, so that's what kind of keeps us on our toes and keeps us going.

DEVIN TENNEY

So, Tom and I know many of the listeners of our podcast are familiar with M&A and they know it can get a little bit spicy, but I'm more curious about what it's like when you sprinkle in a little bit of SALT?

TOM YONCHAK

You know, SALT M&A is really just SALT, you're just really applying it to a buyer side of a transaction or a seller side of a transaction. You're still really applying some of the same SALT principles that you would whether it was a compliance client or consulting client, you just have a different audience, different invested parties who need your analysis on that particular SALT item.

So, you know it can get contentious, certainly. And but that's the deal part of it, right? The actual application of SALT really is the same, just maybe with a different audience, if that makes sense. But the spicy side comes from all the negotiations that come through M&A. Not any different type of analysis per se.

IRIS LAWS

So, clearly, right, there's a lot that goes into this and there's a lot to consider if you have maybe a business, thinking about a transaction? So, I do want to sort of narrow that down. Where do you spend maybe the majority of your time? There are so many facets to this, so where do you focus?

TOM YONCHAK

Yeah. Great question. So, you know, sitting in the transaction advisory group we've got folks that are focused, and I'll speak a little broadly here, we've got folks that are focused on quality of earnings reviews. And that's more on the financial due diligence side. And then we have a broader tax group, tax M&A group, and those folks are also focused on maybe buy-side and sell-side tax due diligence.

Within that group of tax M&A is SALT M&A, which is where I sit. And you know, I would say while we do both buy- and sell-side, where our team is probably more focused on buy-side transactions. Typically sell-sides are going to be focused more on just quality of earnings. But definitely see it some, but I would say buy-side’s where we're gravitating the most.

IRIS LAWS

So, if you're a group within a group, does that mean this topic is a niche within a niche? Is that accurate?

TOM YONCHAK

Absolutely, yeah. You know, it’s, kind of have to peel it back layer by layer. But yeah, definitely a very niche practice. And you know, at the end of the day though, I think the way to think about it, it's still state and local tax, even though it's from an M&A angle. You know, we're helping buyers, we're helping—or sellers—with the same kind of concepts, whether it be state income taxes, sales taxes, property taxes, unclaimed property, payroll.

You know, the tax is still the same, but the strategies are a little different. We're, you know, looking at different things if our client is the buyer, and certainly looking at different things if we're helping a seller undergo a transaction. So, you know, the principle of state and local tax and whatever discipline within that we're looking at is kind of the same.

You know, we're looking to see that it's done appropriately. But maybe the recipient of our services is what changes it a little bit. And so, there's different ways to tackle that of course. But yeah, I think principally, while it is a niche within a niche within a niche, you know it's still SALT and the core fundamentals are still being deployed there.

DEVIN TENNEY

You know, something I'm curious about is, you've been in this space for over a decade and a lot's changed in that time. We've had TCJA, OB3, etc.

TOM YONCHAK

Yeah.

DEVIN TENNEY

I'm curious about what have you seen change on the landscape over that decade? And where do you maybe see it going a little bit?

TOM YONCHAK

Yeah. You know, we've kind of gone through a lot of waves and each wave has brought its unique challenges to it. You know I would say wow, almost 10 years ago now, back in 2018, so about eight years ago, we had the Wayfair decision come out. And that was a significant game changer when it comes to sales and use taxes.

And as most people already know, that kind of transitioned nexus for sales tax to not just being a physical presence, but you can also now have nexus through the amount of revenue in a particular state or the number of transactions in a state. So, economic nexus has been added to the mix. And so, you know, I think Wayfair was such a big game changer.

And honestly, it still is. We're seeing a lot of companies that are slowly adopting it or, you know, pretending it doesn't exist in some cases.

IRIS LAWS

I'm sure.

TOM YONCHAK

So yeah, Wayfair was huge for us. A lot of new, you know, different angles to review things. The constant; rules were changing. Certain states were adopting at different times, different years after Wayfair.

But then absolutely, the tax legislation changes both at the IRS level, you know, IRC changes as well as unique state changes and whether they're going to conform to those IRS changes or not. Each time there's a new package that comes out, it has to be evaluated. And we're analyzing the impacts there just like you guys are.

I mean, y'all are always regularly talking about the impacts of things such as OB3 and other federal legislation changes. I’ve listened to a lot of those podcasts, but each law change, we're certainly trying to be on the forefront of it and think about how that's going to impact our analyses. But definitely going back to Wayfair. That, in my 10 years, I'd say that's been the biggest game changer on the SALT M&A side for sure.

IRIS LAWS

Well, you mentioned being a follower of the pod, which, thank you very much. We love to hear it.

TOM YONCHAK

Yeah.

IRIS LAWS

But obviously you know, then, that a focus of what we try to talk about, right, is actionable advice for our listeners and what they can do. So, for an audience of, say, CFO, CEOs, not necessarily tax people, what advice would you give to them if they would expect to go to market or sell themselves in a few years?

And I think a lot of people think of the general diligence process like that is a given; you're going to do that regardless. But what about SALT M&A? Are those services sort of a must or are they optional?

TOM YONCHAK

I think it's a great opportunity to take a kind of internal look at yourself. If you're about to go to market, right, and do a sell-side analysis, whether it's internal, or hire us to do it, right, and kind of get a dry run, if you will, of what buy-side diligence will be like when you undergo it as the seller.

And certainly, from a SALT M&A perspective, that's making sure we have a good understanding of our nexus issues. Do we file where we should for income or sales tax? What does sales tax look like for us? Have we been compliant? Did we adopt Wayfair appropriately? Do we have unique revenue streams and can we document their taxability? Do we feel good about those positions?

Being able to kind of answer those questions, tell our SALT story, if you will. And so, I would say really, if you're a CFO out there thinking about a transaction, it's never too early to start that process. Thinking about strategically, am I selling a division? Am I selling my entire business? Am I selling equity? Am I selling assets?

And sometimes that's driven by what the buyer wants. But do I want to sell my entire business? Do I want to sell just a portion now and a portion later? So yeah, I think there's a lot of questions to be asked and worked through, and certainly during the transaction itself is probably too late to be working through those types of questions. You want to be armed ahead of time would be my recommendation certainly.

DEVIN TENNEY

You know, Tom, I could not agree more. That's an issue that I harp on quite a bit at the federal level and my area of practice. But I do think it would also be helpful for those who are listening to have a better perspective of what is really the life cycle of due diligence? When we say due diligence and the transaction and all that, what does it actually mean? What does it start with? What does it entail? What does it end with?

TOM YONCHAK

Yeah. So, I think largely driven by what kind of deal are we going to do? I referenced; are we going to buy assets? Are we going to buy equity? Or conversely, are we selling assets? Selling equity? So, I think getting a good understanding of what the structure looks like. And obviously certain situations may only lend itself to one of those transactions or the other.

That may not be an option. I'll even throw a hybrid in there; are we going to do a deemed asset deal where we kind of do an F reorg and get the best of both worlds? But keeping it simple, asset versus equity deal. I think that's kind of the having a good feel of the path forward there. From those choices, that'll really drive the scope of what diligence looks like.

Obviously, if it's an asset deal, you can get away with, the successor liabilities are really more pinned on non-income-type taxes, so you may be able to avoid or kind of pass on some of the income tax diligence. Whereas a full equity type deal you're going to want to look at everything under the sun.

And you know if you're if you're a buyer, that fulsome type due diligence would help understand the profile tax profile of the business. Understand attributes you might inherit, understand exposure. Certainly, you know, due diligence, we often focus on the skeletons in the closet and exposures that may come over. But, you know, attributes come over too in an equity deal and those can be really beneficial and valuable to a buyer.

So, getting your arms around what future deductions may look like that you're going to inherit. Sometimes those are limited, of course, but really getting a full picture of good guys and bad guys to help a buyer make a decision on whether it's a worthy investment or not.

You know, sometimes we're going to find items and we may just need to negotiate and work through those items. Just because we find something that doesn't mean it's a bad thing or a deal killer. We can kind of negotiate and work through those or restructure certain things. But, you know, once we've really worked through, are we buying assets, are we buying equity and we've structured the scope, maybe stepping backwards from the SALT M&A side and just thinking more about tax M&A, this would apply for buyers or sellers.

But you know our team's going to get engaged, typically after a letter of intent been signed. We kind of know the structure as I said. And then what we'll be doing is really analyzing the tax profile of the business being acquired, looking at prior years’ returns, typically three years or so, inquiring about audit history, looking at filing positions, looking for attributes, looking for exposures.

We're going to have a phone call with the management team and their CPA who helps prepare those returns, keep key members of the, you know, accounting staff that are helping with other filings. And then we're going to issue a report to our buyer, typically, because we're doing mostly buy-side. And it's going to give them a nice profile of what they're buying, what they're getting, what they're inheriting, what to be on the lookout for, suggestions on how to steer away from things or structure away from things.

And then maybe there's some things we've found that need to be remediated after the deal closes, and kind of a laundry list of things to tackle post-closing. But hopefully that sort of paints a life cycle picture depending on which deal you're going to pursue. But you know, we love it because we get to touch all of the life cycle parts of the deal and can be really a valuable advisor throughout the whole process.

IRIS LAWS

Yeah, no. Great overview. I think, you know, you touched on that there might be some skeletons in the closet or there also might be some opportunities for deductions down the road. One thing that we didn't necessarily talk about in preparation of this podcast, but, you know, we've talked all the time about tariffs on this podcast, and I know tariff refunds have a potential to impact M&A. And I know that sales tax is impacted by tariffs as well. Is that something that you've seen, like, dealt with in deals, you know, lately given the landscape there?

TOM YONCHAK

Not quite yet, but I know it's coming, right?

IRIS LAWS

Right.

TOM YONCHAK

Especially as the refunds have started to show up. You know, as I said, we're focused more on the last three years. So, that being kind of relatively new, it's coming though. We feel that we're starting to talk about how we might test around that and analyze around that. But it's a new concept that's on its way in, and we're already starting to think about how to test around it and how to plan for it.

IRIS LAWS

Sure. So, building off of that a little bit, what are some of the pitfalls you do normally deal with? Like what are the issues that you frequently have to focus on and work with your clients through?

TOM YONCHAK

Yeah. You know, just being deeply focused on SALT M&A, you know, those issues are always sales tax-driven for the most part. You know, early on it was a lot of nexus concerns about income tax. But then, like I said, after Wayfair it really became sales tax-driven. And then as of late, you know, as states really look for new revenue sources, you may have talked about this on the podcast, but, you know, the income tax rates are coming down in all these states for the most part.

And they're relying less on revenues from income taxes and more on tax revenue from transaction-type taxes. So, your sales taxes, they're broadening their base, right, on taxability in particular states. So, you're seeing new taxation of digital products or increasing the definition of different items in the tax base that maybe were more tangible goods-focused in the past.

Now we're inserting more services in the equation. States are adding, obviously, software has always been kind of an iffy topic on whether a state may tax it or not, depending on its form, but more states are switching over to that. If you even look at a locality which is not a state, but the city of Chicago now has a social media tax and so...

IRIS LAWS

Oh, wow.

TOM YONCHAK

...you know, really the transaction-type taxes and getting away from the income taxes, that's certainly a big focus now. And you know, I would say we spend a lot of our time there, is the variety of sales taxes and whether it's taxable or not. And then occasionally we've got a few other miscellaneous issues, like the states that tax inventory for property tax may pop up here and there. But you know, I think the biggest time we spend is on sales tax for sure.

IRIS LAWS

You know, let's say we've tried our darndest. We recognize that we've done something wrong. I know you mentioned VDAs earlier. I don't know if you remember this, Tom, but I think it was about 10 years ago, it’s been about a decade, but I was first starting at the firm. I was baby, you know, intern new hire Iris, and you staffed me on a VDA project. So, throw back to that, what a time.

TOM YONCHAK

Nice. And still talking about it, yeah.

IRIS LAWS

Yeah, here we are. But for those who may not know what a VDA is, could you give us some background just on what it is and when it might be pursued?

TOM YONCHAK

Yeah. So, VDA is a voluntary disclosure agreement in short, and most states, if not all, have these and allow you to remediate certain taxes. But it's not really meant for hey, I messed up my calculation, I need to fix it. It's really meant for, you know, new taxpayers admitting to not being a prior filer, but should have been, and going to a state anonymously through their CPA and saying, hey, I should have been filing income tax in your state, or I should have been filing sales tax in your state for some time in the past and I want to enter your VDA program.

And it has various parameters that are already set out. Usually, it's public knowledge. It's not really negotiable per se. It's you sort of fall into their rules, which generally are you're going to clean up the last 3 to 4 years, whether it be for income or sales tax or both.

You're going to typically avoid penalties, but you will get assessed interest in most cases. And then they're going to say your history is clean. You know, you're going to clean up the last three years; if you owed for years prior to that, they wipe it away and you get a fresh start, clean record. They won't audit those periods. They can't go after those periods.

TOM YONCHAK

And that's a nice benefit because they didn't have to come find you. You volunteered yourself; you cleaned that up. And so, in the M&A process, when we do find a skeleton, such as a sales tax liability or an income tax exposure for certain states, seller and buyer will negotiate kind of, hey, let's set aside that amount in an escrow or we're going to close this deal.

But the minute the deal closes; seller, you got to go fix these issues because we don't want to inherit them. And so, they'll set aside a certain amount of funds that would satisfy those things, pay for the fees to get it done. And then you use the VDA vehicle to kind of get a fresh start for the buyer, if you will. And highly negotiable on like what states we're going to do the VDA in.

Sometimes we choose to just forego the VDA and file prospectively and take on the risk. So, a lot of negotiation through the M&A process around exposures and how to remediate or what to do about them once the deal closes. But really nice vehicle for both parties; cleaning up old stuff, starting fresh, starting with a clean history, right?

And because I think buyers are really the reason they're highly invested is because when they go to exit after they make their investment, if they don't do a cleanup through the VDA or remediation, that exposure stays with the investment.

And so, now's the time to clean it up when we do a deal. Because when I sell this company, if I sell it in five years now, I'm the one that had the exposure. And so, really like, you know, when these come up and get negotiated, it's time to remediate it as soon as the deal closes.

DEVIN TENNEY

Tom, I know VDA vehicles have been around for a while. They really are a wonderful opportunity for taxpayers out there where it makes sense. Have there been any advancements, any changes on how you're approaching VDAs or how the process may have changed? Anything that you're doing to advise your clients when, you know, pursuing that avenue?

TOM YONCHAK

Yeah. The process hasn't changed much. You know, it was moving at a snail's pace during COVID and it has certainly gotten back to normal speeds to get those done. I think the strategy that really has to be deployed and thought about is escrows when they're set up with a pool of funds to fix these exposures, they have a timeline on them.

So, the escrow may only live for 24 months. And let's say you close your deal. You need to hire a new CFO or get, you know, really just get your, you know, get your team in place before you even bother to worry about remediating. Well, you just maybe lost six months in the process, right? And so, VDAs typically would not take 24 months, of course, but timing is of the essence.

If a VDA is going to take six months from start to finish because you're waiting on the state to respond and process things, you want to make sure you don't lose sight of how long your escrow runs for. And so, nothing's really changed technologically in terms of VDAs, but I think that's the main strategy that has to be, you know, you have to be mindful of is just making sure your time doesn't run out.

I also say, you know, buyers are typically reasonable. You know, they're not asking that every dollar of exposure get cleaned up. You know, it's a business decision, right. And usually they're focused on the worst states with the highest exposures. And that's more of a reasonable approach.

So, that's why it requires some finessing during diligence. And hey, we did calculate this amount of exposure, let's negotiate. Let's talk together. Let's really work together on what population of states are going to get fixed. Which ones are we going to kind of live with that risk, knowing that it may not go away, but we might choose to file there prospectively, and then maybe there's a population we don't do anything because we're not going to do business there anymore. And so, it really brings buyers and sellers together in a conversation.

IRIS LAWS

So, definitely a planning tool and a lot that goes in there, I guess it's been around a while. What are some other sort of concepts that are developing that you're using with your clients from a planning perspective during this process of diligence and M&A?

TOM YONCHAK

Yeah, I mean, I think to be determined on how this shakes out. But, you know, there's definitely been conversations on not just SALT M&A or tax, but do we need to be diligencing targets use of AI? And I think that is certainly a future concept that will have to be thought about; what's their use of AI in their accounting close process? What's the CPA firm's use of AI in the preparation or documentation of, you know, SALT issues?

And so, I think that's going to be certainly where we are headed, maybe, or at least need to be talking out loud with our clients about is what do you know about their use of AI, things like that.

And, you know, going back to all the law changes, just staying on the forefront of all the law changes and trying to keep up with those so that we can be on the forefront of issues as they pop up, would be kind of where I think it's headed.

IRIS LAWS

Very interesting. Well, word on the street, Tom, is that you've got a soapbox speech-type item for gross receipts taxes. What is that? Tell me more.

TOM YONCHAK

Absolutely. So, I think I'm going to get kicked off the speaker list at our annual conference, because I bring it up every year and it's just a repeat slide. But so, gross receipts taxes is another unique item that's part of SALT M&A. Not many states have them. There's probably under 10 states and people have heard of some of them.

The Ohio Commercial Activities Tax—the CAT tax. The Washington B&O— Business and Occupation tax. There's even some localities that have them. San Francisco gross receipts tax or business licenses that are in various municipalities based on gross receipts taxes. We see the Virginia BPOL quite a bit, and that's at the local level.

But when we were interviewing management teams and their CPAs and we say so, tell us a little about do you file gross receipts taxes? What's your policies for determining if you need to file or not? Management's answer is always, oh, our CPA handles that with our income taxes. And the CPA always says we just do their income taxes and then we automatically know; all right, maybe we need to check and see if there's an exposure here. So, the soap box is really it's such an easy conversation to have with our clients.

It's, you know, who's handling it? Is it internal? Is it being internally handled or do we want to engage another party to handle those for us? But knowing they exist, I think, is the first step in the process, and then knowing who's going to handle them is maybe step two.

DEVIN TENNEY

Now, Tom, in my line of work, executive comp and employee benefits, I really do work hand-in-hand with M&A and all of my craziest nightmare stories, etc., come out of M&A. So, I'm just kind of curious, do you have any crazy, you know, deal stories that you can share with us?

TOM YONCHAK

Yeah. You know, I mean, having looked at it for 10 years now or more, you know, and hearing stories, there's always crazy stories about—and we're in a particular part of the market, the middle market, where you do see some of the smaller businesses going to market for the first time—they've never had, you know, funding beyond their initial investment. And so, they're still perhaps using their original CPA and doing things the same way they always had. They've never really had professional management teams brought in that maybe know any better.

But, you know, there's always crazy stories about personal expenses...

IRIS LAWS

Oh, no.

TOM YONCHAK

...being run through your business. Without getting into any details, we had a seller one time who had kind of an allowance for luxury handbags running through her business.

IRIS LAWS

Oh dear.

TOM YONCHAK

You know, so there's always crazy stories like that, of course. Holding on to sales tax funds and not remitting them to a state because they just didn't know how to. That's kind of a no-no, obviously. But, you know, I would say being in the middle market and seeing sellers who are founders, I just love to hear the success stories.

You know, we started this in the mid 1990s, we struggled for years and then now we have this amazing exit story. And so, while there's always crazy stories, I really like to hear kind of the founder stories, too, and how they built something and now they're monetizing it or preparing it for their next generation or the next, you know, the next owner. So, I love hearing those stories, too.

IRIS LAWS

Well, speaking of the next generation, I did want to sort of close out this episode with maybe a look and focus on some of our younger audience members who are maybe just starting their careers. I think a lot of times the general career path is to start in tax compliance or something like that and then move into something more specialized. But for those that might be interested in a career in SALT M&A, how do they get their foot in the door? Like, is there some sort of path that they should be looking at?

TOM YONCHAK

Yeah, great question. There's no true path. You know, we have a great mix of CPAs and attorneys on our team. And you know, it helps to have some tax background, whether that be a little stint in a compliance team. You know, the attorneys we hire have great research skills. And I think that's really the critical component, given the constant change of rules and laws and regs in the different states, is just having someone who's got a great research skill set that can kind of; they don't need to know the answer, but they need to know how to find the answer.

And that's what I think makes a great candidate to join our team. But just good research skills, being able to think quickly and pivot and react given how fast deals kind of move and the requirements there.

But yeah, that'd be my advice for folks that are looking to move into M&A. But again, I think I mentioned it earlier, we touch so many different industries, it's just a great experience to see so many different types of businesses, particularly on the SALT side. That's certainly the benefit and the plus.

IRIS LAWS

And you get to work with Tom. So, also a plus. But regardless, this has been a great conversation. You know, I don't think that the SALT side of M&A is something that a lot of people pay a ton of attention to and after talking to you, I think it should be. So, thanks for giving all of your thoughts and, you know, we'd love to have you back later. Definitely. We'll have you back on the pod. So, thanks for joining us.

TOM YONCHAK

Yeah, this has been great. We'll definitely have to have another SALT M&A or even federal M&A tax. So, a lot of different conversation points for sure.

IRIS LAWS

Sounds good. Thanks Tom.

TOM YONCHAK

Thank you.

IRIS LAWS

All right folks. Well, instead of a “Focused FORsight” this week, unfortunately I do have to share some news that our co-host, Devin Tenney will be moving on from the podcast to his next chapter.

And so, we just wanted to say thank you, Devin, for everything you've done to not only get this podcast up and running, but, you know, find some of our great guests and engage in our conversations. It's been such a pleasure, and we're excited to see what you do next.

DEVIN TENNEY

Well, thanks, Iris, and I really can't overstate how incredible of an experience this has been. I never thought I'd have the opportunity to do something like this and work on a podcast. So, it's been exciting.

I've loved the last year of being able to work with you on this podcast, and it's something I'm always going to cherish. So, it's certainly going to be difficult to move on, but I am very much excited to continue listening and hearing the topics you're going to be talking about every two weeks. And I just know that this podcast is going to be in great hands and have a lot of success moving forward.

IRIS LAWS

Well, thanks for everything, Devin. And with that, that's our show. Thanks for joining. Please be sure to like and follow, and until next time...

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