After a corporate merger, can the surviving company take a sales-tax credit for taxes the non-surviving predecessor paid in error before the merger?

Plain-English summary

A Texas corporation (Company A, incorporated January 1996) merged into a Delaware corporation (Company B, incorporated April 1998) effective April 30, 1998, under Article 5.16 of the Texas Business Corporation Act and Section 253 of Delaware's General Corporation Law, structured as a tax-free reorganization under IRC § 368(a)(1)(F), with Company B keeping Company A's federal ID number. A new rule effective October 1, 1999 lets a permitted Texas taxpayer take a credit on its sales tax return for taxes paid in error to a vendor. The question: could Company B claim that credit for taxes Company A paid in error back during Jan. 1996-April 1998, before the merger?

The Comptroller's answer: yes. The surviving corporation in a merger, once permitted to collect Texas sales tax, may take the credit on its own returns filed after October 1, 1999 for taxes the non-surviving predecessor corporation paid in error -- the merger doesn't cut off that credit right.

What this means for you

Companies that have merged or acquired another entity

If your company survived a merger and inherited a predecessor's Texas sales tax history, you may be able to claim credit for taxes the predecessor paid in error to a vendor, even for periods before the merger closed -- as long as you're the permitted taxpayer filing the return after the October 1, 1999 effective date of this credit mechanism.

Accountants handling post-merger sales tax cleanup

Don't assume a merger extinguishes a predecessor's right to recover tax paid in error -- that right can carry forward to the surviving corporation's own sales tax return.

Common questions

Q: Does merging into another company forfeit a right to credit for sales tax paid in error before the merger?
A: No, per this letter -- the surviving corporation may claim the credit on its own post-merger sales tax return.

Q: Does it matter whether the merger was structured as a tax-free reorganization?
A: The letter addresses a merger structured as an IRC § 368(a)(1)(F) reorganization; it doesn't test other merger structures.

Citations and references

Statutes referenced:

• Tex. Bus. Corp. Act Art. 5.16 (merger of Texas corporations)
• Del. Gen. Corp. Law § 253 (short-form merger)
• Internal Revenue Code § 368(a)(1)(F) (tax-free reorganization)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9911916L

Original ruling text

November 22, 1999

Subject: (no subject)

Thank you for your recent e-mail. You provided the following scenario:

Company A was incorporated in Texas on Jan. 1996. Company B was incorporated
in April 1998 in Delaware. Company A was merged into Company B effective April
30, 1998, pursuant to Article 5.16 of the Texas Business Corporation Act and
Section 253 of the General Corporation Law of the State of Delaware. Company A
kept the same federal id as Company B. The merger was treated as a
reorganization under Section 368(a)(1)(F) of the Internal Revenue Code.

Company A: Jan. 1996 through April 1998
Company B: May 1998 through Current

Effective 10/1/99 a permitted taxpayer can take as a credit on their sales tax
return any taxes paid in error to a vendor.

Question: Can Company B take a credit for taxes paid in error for the period
Jan. 1996 through April 1998?

Response. The survivor corporation in a merger that is permitted for Texas tax
collection may take credit on their sales tax returns after October 1, 1999 for
taxes paid in error by the non surviving corporation.

Several publications and other items of interest (including the Texas Tax Code)
are also available on our web page http://www.window.state.tx.us/.

Sales tax rules are available at
http://www.window.state.tx.us/taxinfo/rulendx/rulelist3.html#sst.

This opinion is based on the facts presented. Different facts though
similar, may result in different answers. If you have any questions or need
more information, you may call me toll free at 1-800-531-5441, extension
5-0613. You may also write to Tax Policy Division, Comptroller of Public
Accounts, Post Office Box 13528, Austin, Texas 78711.

Kevin Koller
[email protected]