Key Takeaways

  • Orion Advisor Solutions' diligence team claimed HiddenLevers owed $600,000 in uncollected state sales taxes following shifting state tax rules for SaaS companies.
  • A delayed $2 million enterprise contract triggered an aggressive, near-50% retrade attempt by the buyer just 24 hours before diligence exclusivity expired.
  • Rather than taking a dollar-for-dollar purchase price deduction, Praveen Ghanta audited contracts state by state to eliminate non-nexus jurisdictions.
  • Carving out bespoke software engineering fees and apportioning multi-state enterprise footprints shrank the final tax liability to $100,000.
  • Sell-side defense against broad accounting estimates requires Ghanta's 3-Step SaaS Sales Tax Diligence Defense Method.

The $600,000 Quality of Earnings Tax Dispute

During sell-side quality of earnings and tax diligence, buy-side accounting teams frequently treat historical sales tax exposure as a blanket purchase price reduction. When Orion Advisor Solutions moved to acquire wealth-tech platform HiddenLevers, the buyer's accountants produced an initial liability calculation of $600,000 in uncollected state sales taxes.

“What was one of the issues that came up? That was the contention of the buyer that we owed 600,000 in sales taxes,” Ghanta explains. “And that was because the law changed while we were a SaaS company.”

Rather than accepting the buyer's top-down estimate, Ghanta dug directly into billing records. Buy-side accountants had assumed blanket liability across every jurisdiction where HiddenLevers had customers. The seller countered by proving that transaction counts in almost all states sat well below statutory economic nexus thresholds.

“And as it turns out, you go state by state, apportioning your clients. Where are these clients? How many transactions have we actually done state by state? And we were able to disqualify all but like five states off the bat that we've only got like one customer there,” Ghanta recalls.

Next, Ghanta targeted enterprise customer billing. When enterprise clients were headquartered in high-tax states, the buyer's model had assigned 100% of the contract value to that single state. Ghanta proved that users were distributed across satellite offices and international branches. He then separated custom integration work from recurring subscription revenue.

“And then there was a lot of customization that we had done for them that was charged. Well, you can't tax the customizations. That's the custom software aspect. So we whittled it down, whittled it down, whittled it down,” Ghanta says. “We got that bill down from 600. Our contention was that it should have gone down from 600 to about 60. They pushed back and said, 'No, we're not comfortable taking that risk.' We got down from about 600 to about 100.”

The Ghanta's 3-Step SaaS Sales Tax Diligence Defense Method

  • Step 1: State-by-State Nexus Disqualification: Audit customer locations and transaction volumes state by state to disqualify jurisdictions where transaction counts or revenue fall below economic nexus thresholds (e.g., disqualifying states with only one customer).
  • Step 2: Multi-State Enterprise Footprint Apportionment: For large enterprise clients headquartered in high-tax states, map out the operational footprint of their users across satellite offices and overseas branches to apportion and shrink the revenue attributed to the headquarters state.
  • Step 3: Customization and Professional Services Carve-Out: Identify and carve out fees billed for bespoke development, integrations, and customization from the software subscription revenue, as custom software and professional services are typically exempt from SaaS sales tax.

When This Works (and When It Doesn't)

This framework applies during sell-side M&A tax diligence when buyers present large retroactive sales tax exposure estimates for SaaS companies operating without historical sales tax collection across multiple states.

It breaks down when a company has sold high-volume, self-serve subscriptions to thousands of individual users in single jurisdictions. In those environments, transaction counts quickly clear statutory nexus bars, leaving no room to argue single-customer exemptions. Similarly, if historical invoices fail to separate custom professional services from core software subscriptions on itemized line items, state revenue departments and buy-side auditors will treat the entire contract value as taxable software revenue.

Why It Matters

In middle-market software M&A, quality of earnings and tax diligence are standard renegotiation fronts. Buy-side accounting firms intentionally model tax risks under worst-case assumptions, handing deal teams a pre-packaged rationale to trim enterprise value or demand massive special escrows. When sellers lack transaction-level contract data, these six-figure deductions stand uncontested.

Defending enterprise value requires treating diligence disputes as granular data negotiations rather than high-level legal debates. “Anybody who doesn't want to do that and get into the accounting weeds and slug it out with accountants, well, you better have armed your accountant to do that job,” Ghanta notes. When a late enterprise contract slip coincides with a tax audit, buyers will stack issues to attempt deep retrades. Defending purchase price requires operational command over contract details.