State and Local Tax in M&A Transactions
Exposure found by the buyer becomes a price term. Exposure resolved before the data room opens does not.
Core tax diligence on an acquisition is usually run by the buyer's accounting firm, and the purchase agreement is drafted by deal counsel. State and local tax sits in the seams between them: a target's sales tax footprint in states where it never registered, a California property tax reassessment triggered by a stock purchase, a seller's unpaid sales tax that follows the business to its buyer, and the state audits of pre-closing periods that arrive after everyone has moved on. The firm takes those pieces as defined scopes within the transaction.
The firm takes defined pieces of state and local tax work within a transaction and works alongside the deal team's accounting firm and counsel. It does not perform quality of earnings, attest, or full-scope financial due diligence. The work is senior throughout: the person who scopes the review is the person who runs it and the person who signs the deliverable.
The page is written for the people who bring the firm in: deal counsel, including M&A and tax lawyers; private equity and family office deal teams; investment bankers; and the owners and chief financial officers of companies preparing for sale.
What the firm takes on
Sell-side readiness
Before a company goes to market: a nexus review across the states where it sells, ships, employs people, or holds inventory; exposure sizing for sales and use tax and for income and franchise tax; voluntary disclosure agreements that close the exposure before a buyer finds it; and registration cleanup. Exposure found by the buyer becomes a price reduction, an escrow, or a special indemnity. Exposure resolved before the data room opens does not. The review runs independent of the return preparer.
Targeted buy-side diligence
Where the broader diligence scope covers state tax lightly or excludes it, a focused review of the target's filing footprint against its activity: sales tax collection and registration by state, income tax filing positions and apportionment, payroll withholding by state, and property tax compliance. The work is targeted and scoped to the questions the deal team asks. It is not full-scope financial or tax due diligence.
Remediation after signing or closing
When diligence flags exposure and the purchase agreement answers with a special indemnity, an escrow, or a holdback: quantifying the exposure by state and period, running the voluntary disclosures, handling the state notices and negotiations that follow, and closing out the escrow with documentation. Diligence identifies. This is the fixing.
Representation and warranty insurance support
Known state tax exposures are commonly excluded from coverage, which makes the size of each exposure a negotiated number. A defensible quantification, by state, tax type, and period, supports that negotiation from either side of the table.
Post-closing disputes
Pre-closing tax indemnification claims, state tax items in the working capital adjustment, and state audits of pre-closing periods that arrive after the deal: the computation, the documentation, and representation before the taxing agency through audit, protest, and appeal, as described on the Controversy page.
Software targets from 2027
From January 1, 2027, prewritten software, whether delivered on media, transferred electronically, or accessed remotely, is tangible personal property for California sales and use tax purposes (Revenue and Taxation Code section 6016.1, added by Stats. 2026, ch. 23, read with section 6016). Section 6016.1(b) excludes digital infrastructure (cloud platforms on which users run their own software), digital video game products, and the other listed categories, so what a software target sells decides whether the rule reaches it. Every California software target diligenced from here on carries the question of what was collected, what was owed, and what the contracts say. The library's SB 122 article covers the law.
Deal structure: the California consequences
A stock or interest purchase through which one buyer obtains, directly or indirectly, more than 50 percent of a corporation's voting stock or a majority ownership interest in a partnership, limited liability company, or other entity is a change in ownership of the real property the entity owns under Revenue and Taxation Code section 64(c). Where property came into the entity in a proportional-interest transfer excluded under section 62(a)(2), the owners immediately after that transfer are its original co-owners, and their cumulative transfers of more than 50 percent of the interests trigger reappraisal of that property under section 64(d). The acquirer of control, or for an original co-owner change the entity itself, files a change in ownership statement with the State Board of Equalization within 90 days (sections 480.1 and 480.2), and a missed filing adds a penalty of 10 percent of the taxes on the new base year value (section 482(b)). Since 926 North Ardmore Avenue, LLC v. County of Los Angeles (2017) 3 Cal.5th 319, the same change in ownership can carry the county documentary transfer tax under section 11911 when a written instrument reflects the sale, recorded or not and with no deed; charter cities that impose their own transfer taxes add them at rates they set for themselves. The library's transfer tax article has the analysis, including the continuing partnership exemption under section 11925.
On an asset purchase, the buyer of a business or stock of goods withholds enough of the purchase price to cover the seller's unpaid sales and use tax until the seller produces a receipt showing payment or a certificate that no amount is due; a buyer that fails to withhold is personally liable to the extent of the purchase price, and the California Department of Tax and Fee Administration has 60 days from the latest of the buyer's written request, the sale, or the date the seller's records are made available for audit to issue the certificate or state the amount that must be paid (Revenue and Taxation Code sections 6811 and 6812). Whether a transaction treated as an asset purchase for federal purposes carries the same treatment in California is covered in the library's articles on the section 338(h)(10) election in California and its consequences in other states. Bulk sale notices and transfer taxes outside California are checked state by state as the deal's footprint requires.
From the library