In an industry defined by compliance and complexity, overlooking tax exposures is a costly mistake. Savvy buyers can reduce risks by engaging in tax diligence early enough to influence structuring decisions and valuation determinations.
By Tara Lancaster, Elazar Guttman, Ashley Moulder, and Noah Goldberg
In waste management transactions, complexity is a given: regulatory compliance, asset-heavy operations, and multistate footprints all combine to create distinct challenges for dealmakers. What may be less apparent are the state tax exposures lurking inside these businesses.
For strategic buyers and private equity sponsors, state tax liabilities can materially affect valuation, deal structure, and post-closing operations. This article highlights the most common state tax pitfalls in waste industry M&A鈥攁nd offers practical guidance for addressing them.
Sales and Use Tax
Sales tax considerations can become pivotal deal points, as the transfer of tangible assets and the applicability of exemptions can significantly impact economics.
The General Rule: Tangible Property Transfers are Taxable
Nearly every state taxes the transfer of tangible personal property, whether transferred by sale or lease. In waste deals, tangible property commonly includes truck fleets and transport vehicles; dumpsters, roll-off containers, and compactors; transfer state and shop equipment; and customer-leased containers and equipment. Unless a specific exemption applies, transfers of these assets may trigger significant sales tax liabilities.
The 鈥淥ccasional Sale鈥� Exemption鈥攁nd its Limits
Most states provide an 鈥渙ccasional sale鈥� exemption for sales of substantially all assets. Many buyers often assume that a whole-business asset sale qualifies for this blanket exemption. These exemptions, however, are not all encompassing. Inventory is often excluded, and motor vehicles are frequently carved out. For a hauler with hundreds of titled trucks, this carve-out can create a multi-million-dollar tax bill, even if the deal is structured as a whole-business asset sale.
One mitigating strategy is to structure the deal as the purchase of the target鈥檚 equity interests. Because the assets themselves do not technically change ownership, equity deals usually fall outside the reach of sales tax. That said, buyers should not assume equity deals are bulletproof. Some states have sought to 鈥榣ook through鈥� the equity form and impose tax based on the substance of the deal, particularly where the target鈥檚 value is concentrated in tangible, taxable assets.
Because sales taxes are considered 鈥渢ransfer鈥� taxes, this issue arises in the context of negotiating the economic responsibility for transfer taxes. Before agreeing to the market convention of splitting fifty-fifty, buyers should consider the deal structure and diligence the size of the target鈥檚 titled vehicle fleet. If sales tax will apply and the bill will be material, buyers could factor this into their valuation determination or push transfer taxes to the seller鈥檚 side of the ledger.
Resale and Lease Exemptions
There is also the separate issue of whether the target is in compliance with its operational sales tax obligations. If tangible personal property is transferred for resale or lease, the transaction may qualify for a 鈥渞esale鈥� exemption if the customer acquires the property with the intent to resell it in the ordinary course of its business. If the customer is not the end user of the property, its initial purchase is not taxed in order to prevent double taxation. Importantly, this exemption is only available if 1) the customer is properly registered and 2) the seller collects a valid resale certificate to substantiate the exemption.
In practice, waste companies often fall short on the paperwork, particularly for equipment leases or rentals that are bundled into service contracts. If the target company has not been collecting resale certificates, the state tax authority will assume the sale was taxable and assess back taxes plus penalties (which can often exceed the original tax liability). Even if the target鈥檚 customers were valid resellers, good faith reliance is not sufficient to avoid sales tax liability if the certificates are missing, expired, or incomplete.
It is therefore important to review whether the target has all necessary resale certificates on file. Buyers should also test a sample of container rental agreements for missing certificates. If documentation is missing, it may be possible to obtain resale certificates prior to closing, but this is often time-consuming and impractical. Where documentation gaps exist, buyers should discuss with their legal counsel about whether a special indemnity or escrow holdback would be appropriate.
Property Tax
Waste companies face annual property tax on tangible business assets such as vehicles, roll-off containers, compactors, and transfer station equipment. Because assets often move across jurisdictions, determining the correct tax reporting jurisdiction can be convoluted.
Local jurisdictions typically require annual asset listings (renditions). For most waste companies with mobile fleets, inaccurate renditions can lead to double taxation or exposure for noncompliance penalties. For example, if a waste hauler鈥檚 roll-off trucks are regularly dispatched across state lines, but the target mistakenly lists them on property tax renditions in both New Jersey and Pennsylvania, both jurisdictions may assess tax on the same assets. Without proper documentation, the buyer could inherit a double assessment or face penalties for failing to file in the correct location. From a deal perspective, property tax misallocations could adversely impact valuation if normalized EBITDA is inflated (because recurring costs are understated).
During diligence, buyers should reconcile renditions with depreciation schedules and GPS fleet data, if available. The information will be helpful for quantifying exposure and to inform negotiations over escrow and indemnity coverage. More importantly, once the deal closes, buyers should implement compliance procedures to consistently track fleet locations and maintain substantiating documentation, ensuring the issue does not resurface in an exit transaction.
EIN Continuity
A waste company鈥檚 employer identification number (EIN) is often critical to the company鈥檚 regulatory and operational profile. Careful transaction planning is necessary to avoid compliance headaches and business disruptions.
EINs as Regulatory Anchors
In heavily regulated industries like waste management, a company鈥檚 employer identification number (EIN) can be more than just a tax ID number. An EIN oftentimes is the foundation of the company鈥檚 compliance and operating profile. Regulatory oversight authorities often use a company鈥檚 EIN to track Environmental Protection Agency (EPA) permits, hazardous waste manifests, Department of Transportation (DOT) registrations for fleet operations, insurance and pollution liability filings, and financial responsibility documentation. In addition to regulatory compliance, counterparties and vendors frequently will use a company鈥檚 EIN for trade credit checks and 鈥渒now your customer鈥� requirements.
The Risk of EIN Changes
A change in the company鈥檚 EIN can result in a cascade of regulatory compliance issues. Structuring a transaction in a manner that results in a new EIN may require re-registration with federal and state environmental agencies, amendment or renegotiation of vendor and municipal contracts, and regulatory requalification (sometimes requiring audits or inspections). Even beyond the regulatory and compliance nightmare, a new EIN could result in material business disruptions if third parties are unable to verify the operational reputation of the company.
When structuring a deal in the waste management space, it is imperative for legal counsel to consider the impact of a change to the company鈥檚 EIN and structure the deal in a manner to preserve the EIN where necessary.
The Bottom Line
In an industry defined by compliance and complexity, overlooking tax exposures is a costly mistake. Multiple taxing jurisdictions means there is more room for error or inconsistent reporting. Fleet size is a core value driver, but also presents a concentrated risk. State tax considerations can impact valuation, leave a buyer exposed to unexpected liabilities and delay integration and billing. Savvy buyers can reduce these risks by engaging in tax diligence early enough to influence structuring decisions and valuation determinations, and work with their counsel to strike the right balance between escrow holdbacks and indemnities where risks cannot be fully mitigated. | WA
Tara Lancaster is a partner with Sidley Austin LLP in Dallas, TX and a member of Sidley鈥檚 Tax practice. She represents private equity sponsors and corporate clients on federal income tax matters covering a broad range of international and domestic transactions, including mergers and acquisitions, divestitures, joint ventures, debt financings, restructurings, and securities offerings. She also has experience advising clients on transactions involving the formation and acquisition of real estate investment trusts (REITs) and guiding them on real estate acquisitions, dispositions, and restructurings. Tara has provided tax advice on transactional matters for clients in a variety of industries, including consumer and retail, technology, energy and natural resources, infrastructure, healthcare, and professional services. She can be reached at [email protected].
Elazar Guttman is a partner with Sidley Austin LLP in New York and a member of the firm鈥檚 M&A and Private Equity practice. He focuses his practice on advising private investors, including private equity firms and their portfolio companies, family offices, and entrepreneurs/founders on various domestic and cross-border leveraged buyouts and other complex business transactions, including acquisitions, divestitures, debit and equity financings, growth capital investments, joint ventures, and in- and out-of-court restructurings. His experience spans numerous industries, including environmental services, financial services, business services, healthcare, energy, technology, automotive, manufacturing, insurance, and retail, among others. Elazar can be reached at [email protected].
Ashley Moulder focuses her practice on energy and corporate matters. She is a senior managing associate with Sidley Austin LLP in Houston and earned her J.D., summa cum laude, from Brigham Young University J. Reuben Clark Law School. Ashley can be reached at [email protected].
Summer associate Noah Goldberg also contributed to this article.