For fund CFOs, COOs, and controllers, protecting returns means looking beyond income tax. Sales and use tax can create overlooked costs in a management company’s operations and, for private equity and venture capital fund managers, in the portfolio companies they invest in. Unresolved issues can consume cash, stretch lean finance teams, and complicate a transaction.
The right starting point depends on your strategy. A hedge fund or digital asset fund manager may begin with technology purchases and management company controls. A private equity or venture capital fund manager may also need to evaluate portfolio company exposure from diligence through exit. The objective is the same: identify the right entity, understand its activities, and focus effort where it matters.
Start with the Entity, Not Just the Fund
Management companies and fund entities: Review which entity contracts for, pays for, and uses software, data subscriptions, equipment, and other potentially taxable purchases. A vendor invoice without sales tax does not necessarily mean a purchase is exempt. Depending on state rules, the purchaser may need to accrue and remit use tax. Shared costs warrant a closer look at contracts, user locations, and the entity responsible for reporting.
Portfolio companies: For fund managers investing in operating businesses, review each company’s sales, products, customer locations, employees, and inventory. Physical presence and economic activity can create state obligations. A portfolio company’s exposure should be evaluated separately from the fund’s and management company’s obligations; common ownership alone is not a substitute for an entity-specific analysis.
Where Exposure and Opportunity Can Hide
- Technology and purchasing: Software, cloud services, and data tools merit review because tax treatment and sourcing vary by jurisdiction. Test both underpayments and overpayments, including duplicate tax and incorrect application of exemptions. Refund eligibility and filing periods depend on the state and the facts.
- Growth without updated compliance: New markets, remote employees, product launches, and acquisitions can outpace registrations, taxability decisions, and filing processes. For operating companies, inventory held in third-party warehouses is another reason to revisit the state footprint.
- Documentation and ownership gaps: Missing exemption certificates, inconsistent billing data, and unclear responsibility for notices or filings make it harder to defend a position. Fund accounting or income tax support should not be assumed to include sales and use tax compliance. Confirm the scope and owner explicitly.
Make Indirect Tax Part of the Investment Lifecycle
Diligence and Acquisition
For private equity and venture capital investments, assess the target’s historical nexus, registrations, taxability, exemption documentation, and purchase-side use tax. Findings can inform valuation discussions, indemnities, escrows, and the post-close work plan. For minority investments, use the information and governance rights available to raise issues with company leadership.
Where historical noncompliance exists, evaluate voluntary disclosure before taking remedial steps. Eligibility, lookback periods, and penalty relief vary, and prior state contact can affect access to a program. A voluntary disclosure agreement is a potential resolution path, not an automatic outcome.
The First 100 Days and Ongoing Operations
After an acquisition, assign owners to open notices, registrations, filings, and system corrections. Establish a process for purchase-side use tax and prioritize refund reviews where spending and documentation support them. For hedge fund and digital asset fund managers, apply the same discipline when launching a management company, adding offices, or changing technology vendors, even when there is no operating company acquisition.
Co-sourcing or outsourced compliance can help a lean finance team manage recurring work. Clearly define who supplies data, reviews returns, approves payments, and responds to state notices so responsibilities remain visible.
Growth and Exit Readiness
Revisit the tax footprint when operations change. For portfolio companies, keep taxability decisions, exemption certificates, filing histories, and remediation records organized for buyer diligence. For fund managers, maintain purchasing controls and records as teams and technology use expand. Addressing issues earlier can reduce avoidable disruption at a transaction or other critical milestone.
A Practical Starting Point
Start with a focused discussion with your Richey May engagement team. Identify the entities involved, upcoming transactions, new jurisdictions, significant technology spending, and unresolved notices. Rank the work by potential exposure, recoverable cash, timing, and internal capacity. A targeted review of one management company or priority portfolio company can establish a practical path forward.
Growing With Our Clients
Over the past year, Richey May has expanded nationally, and much of that growth has come directly from what our clients asked for. As fund managers and their portfolio companies looked to us for support on more of the issues that affect their returns, we added the capabilities to deliver it, including a dedicated indirect tax team.
Our indirect tax partners each bring decades of experience, including leadership roles at Big Four and other national firms, and the broader team includes CPAs and former state sales and use tax auditors who understand how states approach an audit from the inside. Together, they support nexus and exposure reviews, refund recovery, registrations, voluntary disclosure negotiations, transaction due diligence, audit defense, and ongoing compliance, with the scope tailored to each entity and its needs.
Planning an acquisition, expanding operations, or reviewing technology spend? Contact Steve Vlasak today, and he’ll connect you with our indirect tax team to discuss where a focused indirect tax review could be useful.
