State and local tax (SALT) issues may arise from mergers, acquisitions, or dispositions. Eversheds Sutherland Partner Todd Betor presented on Unique State Tax Issues at Tax Executives Institute’s 2023 Mergers & Acquisitions Seminar last week in Nashville, TN.

In addition to the need for SALT advisors to get involved at the outset of a deal, the following are three key takeaways from Todd’s panel presentation.

  1. States (and some localities) divert from the federal tax treatment of certain transactions;
  2. SALT deal considerations go beyond how states view a transaction; and
  3. Considering SALT issues as part of a plan can result in meaningful tax savings.

States Do Not Always Follow Federal Tax Rules or Results

As a general rule, states are not bound to conform to the federal tax treatment of a transaction. Indeed, the myriad of state responses to the 2017 Tax Cuts and Jobs Act and, more recently, the 2020 CARES Act demonstrates how very real the disconnect between federal tax provisions and state conformity therewith can be.

A prime example of this disconnect is illustrated by states’ varying levels of conformity to Internal Revenue Code (IRC) Section 381, which governs preservation/carryover of tax attributes,1 including net operating losses (NOLs) of the target company.

While a majority of states generally conform to IRC Section 381, a fair number do not. Massachusetts, for instance, decouples from the federal provision with respect to NOLs via regulation – 830 CMR § 63.30.2(9)(a). That regulation provides in the case of a merger of two or more corporations where there is a single surviving/successor entity, the NOLs of the corporation merged out of existence are eliminated. In other words, the surviving/successor entity only succeeds to, or more appropriately, carries forward the NOLs that a surviving corporation incurred prior to the merger. An unexpected result may occur where two or more existing corporations consolidate into a new corporation. In that situation, Massachusetts regulations provide that the new corporation has no NOLs—any NOLs of the consolidated entities are lost.

Massachusetts’ deviation from IRC Section 381 is but the tip of the state tax iceberg that companies and practitioners must navigate in evaluating and implementing a merger, acquisition, or divestiture, among other transactions. And this example merely serves to highlight the complexity state tax brings to a deal.

SALT Deal Considerations Go Beyond How States View a Transaction

How states ultimately view a transaction and the implications stemming therefrom is but one piece of the SALT considerations that go into a deal. Two examples of other major SALT considerations are discussed below.

A significant SALT consideration is the “track record” of the target company/business, e.g., historic tax positions, filing methodologies, audit history, etc., which the buyer should consider in moving forward with a transaction. This issue relates to successor liability of the buyer for SALT exposures inherent in stock and asset deals.

What a target’s SALT track record looks like, and how it looks through the lens of a buyer, can have a significant impact on a deal, including pricing. More often than not, a SALT risk is identified—typically in the diligence process, either proactively by the seller or raised by the buyer—that cannot otherwise be overcome by the buyer through negotiations (for example, the seller getting the buyer comfortable with the target’s position on the taxability of a service offering). When this occurs, the parties commonly seek to address the risk through seller indemnification, seller escrow (i.e., placing a portion of the purchase price in escrow pending a triggering point for use/release), and/or a purchase price reduction.

How a SALT risk is handled in the transaction agreement (e.g., indemnification, escrow, purchase price adjustment) is generally dependent on the scope of the risk, the risk appetite of the buyer, and advice of SALT advisors. On this last point, it is often that the parties will have differing positions on the historic tax position of the target—typically with respect to sales and use taxes. SALT advisors can add value by substantiating a position or otherwise providing context and support for a target’s position. And the advice may support the elimination or narrowing of an indemnification provision, escrow amount, or purchase price adjustment.

On the other side of the table, a SALT advisor’s role is to advise the buyer on the financial exposure related to pre-transaction tax liabilities of the target. This role is all the more important if a buyer is planning on, and/or the transaction agreement contemplates, the pursuing voluntary disclosure agreements (VDAs) to preemptively address SALT risks.

From the buy-side, another significant SALT consideration is what the post-transaction tax picture may look like. Though the implications are post-transaction, this analysis and planning should be contemporaneous with the steps leading up to close.

At a high-level, this generally involves a review of a target’s nexus footprint with a focus not just on current filing states, but also evaluating a target’s profile based on employee location (payroll), property location, and source of receipts (sales), and comparing that footprint to the buyer’s existing SALT filing profile. Hand-in-hand with the nexus evaluation is how the target will be viewed from an income tax filing perspective, particularly whether there will be “instant unity” of the target with the buyer’s existing business such that target would be included in the buyer’s existing state income tax reporting groups.

Consideration of SALT Issues as Part of a Plan Can Have Meaningful Tax Savings

Considering SALT issues as part of a plan can result in meaningful tax savings. For example, the use of equity consideration can lead to a significant state franchise (or net worth) tax exposure. These taxes are privilege taxes—taxes imposed for doing business in a state—that are generally based on a taxpayer’s total equity value.

A prime example is the Illinois Franchise Tax, administered by the Illinois Secretary of State as opposed to the state’s Department of Revenue, which utilizes “paid-in capital” as the base for the tax (as imposed on corporations) and is imposed on a separate company basis.2 The term is broadly defined to include – 

the sum of the cash and other consideration received, less expenses, including commissions, paid or incurred by the corporation, in connection with the issuance of shares, plus any cash and other consideration contributed to the corporation by or on behalf of its shareholders, plus amounts added or transferred to paid-in capital by action of the board of directors or shareholders pursuant to a share dividend, share split, or otherwise, minus reductions . . .. 3

The franchise tax implications of using equity consideration, specifically issuance of additional equity, are illustrated in the 2004 case of USX Corp. v. White.4 In that case, USX Corp. (USX) had issued additional shares of its stock (133,184,470 shares), which was used as consideration in a reverse subsidiary merger with Texas Oil and Gas Corporation. For purposes of its Franchise Tax, USX reported $2.99 billion as the entire consideration received for issuing the new USX stock—a $2.99 billion increase in paid-in capital. The case ultimately dealt with the application of an exclusion Illinois affords to vertical mergers—which the court found did not apply to USX’s fact pattern.

The above highlights the need for careful planning as to transaction consideration and its impact on a company’s franchise tax liability. Post-transaction debt restructuring can also have a significantly similar tax impact. All too often, though, SALT advisors are called upon to address the tax impact after the fact; further enforcing the need for SALT advisors to get involved at the outset of a deal.


Putting aside limitations on tax attributes under IRC Sections 382, 383, and 384, and states’ conformity therewith. 

2 805 ILCS §§ 5/15.25, 15.40, 15.55, 15.70.

3 805 ILCS § 5/1.80(j).

4 352 Ill. App. 3d 709 (Ill. App. Ct. 2004).