During times of transition, employers often neglect the employment tax area, while focusing on other business and organizational issues critical to the long term success of a transaction or restructuring event.  Consequently, important obligations, risks, and opportunities associated with mergers, acquisitions, and related employee migrations are commonly overlooked.  The result: costly compliance issues, missed tax recoveries, and forfeiture of future savings opportunities.

Compliance

The employment tax landscape has changed dramatically over the past few years at both the state and federal levels. 

The business decline brought on by the dot.com bust and 9/11 during the early part of this decade severely eroded state unemployment reserves nationwide.  In desperation, the states turned to the fed for assistance and funding.  As the states' unemployment systems had been self-correcting fund deficiencies for many decades, the fed identified that the states' financial woes were due in part to widespread “SUTA dumping,” and other tax-avoidance practices (both intentional and unintentional) that skirted the intent and spirit of state regulations.  Many companies and third party employer organizations utilized these methods to reduce their unemployment tax contributions.  In response to these circumstances, in August 2004 the fed passed into law the “SUTA Dumping Prevention Act”.  The act mandated that the states enact legislation and implement enforcement to put a stop to these tax avoidance practices.  As a result of the consequent onslaught of recent (and ongoing) state legislation nationwide, employers are now under much stricter reporting and disclosure requirements related to mergers, acquisitions, restructurings, and other employee migrations and corporate events.  State agencies are establishing sophisticated “triggers” to highlight employer discrepancies.

What were once considered minor reporting violations can now result in severe consequences, such as tax audits, penalty and interest assessments, assigned maximum tax ratings for up to 5 years, and other harsh civil and criminal penalties.  Minor compliance issues with current transactions may serve as the looking glass for states to launch extensive audits of prior M&A activity.  Simply stated, corporations need to apply a higher level of expertise to M&A and other transition-related employment tax issues to avoid these costly results.

Employers’ Rights

A brief explanation of employers' rights as related to employment tax may be helpful in better understanding our services and your organization’s opportunities. 

When a company acquires another entity, the acquirer may be entitled to a wide range of beneficial rights related to the predecessor’s employment tax contributions, rates and reserves.  These rights are subject to complex regulations, statutes and successor definitions which vary by jurisdiction, and various other factors such as type of transaction, timing, and on a procedural level, the details of registration and reporting.  Many such rights and tax-savings opportunities begin to erode within the first 90 days of closing.  The optimal time to secure the best possible employment-tax position is at the time of a transaction, when all tax strategies and options still remain available.  Depending on transaction details, acquired employee compensation, population size, and other variables, being strategic at the time of a transaction can save many millions of dollars.  The financial benefits may continue for several years.

Similarly, companies with large employee populations, operations in multiple jurisdictions, and activities such as reorganizations, relocations, and other employer-related changes are at a far greater risk of having “non-transactional” over-payments and recovery opportunities embedded within their tax accounts.  All beneficial rights and potential recoveries generally expire within 3 years of an event or overpayment.  As result, employment tax savings opportunities are commonly missed.

M&A Transition Consulting (optimizing tax and compliance in the wake of an event)

Utilizing ETS’ M&A transition consulting services at the time of a transaction ensures clients:

·            Meet all statutory reporting and compliance requirements,

·            Minimize or prevent (where possible) the carry-forward of any predecessor liabilities,

·            Optimize reporting structures and successor rights with all applicable agencies, and

·            Aggressively pursue and secure all strategies allowed by law to maximize recoveries and minimize future tax contributions.

Retrospective Research & Recovery (ensuring compliance and recovering excess from the past)

STAR, our contingency-fee based retrospective research & recovery program, ensures clients are compliant with all applicable agencies, and have realized all possible savings opportunities from the past, still within statutes.

·            STAR generates tax refunds and future savings where allowable by statute, while limiting potential penalties and interest by uncovering compliance issues.

·            Because STAR is conducted on a contingency basis, ETS receives no compensation unless our client recovers excess tax payments. 

·            Whenever possible, ETS works directly with state agencies, vendors and predecessors to obtain information, so that client staff time is kept to an absolute minimum.