Unprecedented taxpayer-initiated MTC joint audit program yields benefits to all parties.

• Author: Bernier, Donna A.
• Position: Multistate Tax Commission

Introduction

Mergers and acquisitions between multi-billion dollar enterprises do not happen every day. Neither do "taxpayer initiated" examinations by the Multistate Tax Commission. But such an undertaking is exactly what happened after the Hewlett-Packard and Compaq Computer merger was announced in September 2001 and completed in May 2002.

Exciting, challenging, beneficial, and maybe even bizzare? Maybe, but we believe it was the right choice for our company.

History

In September 2001, Hewlett-Packard Company (HP) announced its intention to merge with Compaq Computer Corporation. HP acquired 100 percent of Compaq's shares on May 3, 2002, and on December 31 of that year Compaq's operations were merged into HP's operations. Before the merger, Compaq had been rather busy with acquisitions of its own. Specifically, Compaq had acquired Tandem Computers (merged into Compaq in 1999), Digital Equipment Corporation (merged into Compaq in 2000), and then Custom Edge Inc. (formerly known as InaCom, merged into Compaq in 2002).

Due Diligence/Audit Review

After the HP-Compaq merger, the new HP combined sales tax group began an intensive review of the company's audit situation. Several state audits were still inventoried or in progress for Tandem, Digital, and Custom Edge. We also learned that 22 Compaq state audits were queued up but not yet scheduled. We anticipated that virtually all of the states would seek to do "close-out" audits because companies as large as Compaq (revenues of $33.5 billion in 2001) rarely stop doing business. Dealing with the existing audit backlog and knowing that 46 states and 140 local close-out audits were imminent, we felt our best option was to adopt an active approach.

This led the HP sales tax group to hold an audit brainstorming meeting in Houston in September 2002. We had many challenges to address and overcome, including data processing and other computer systems, time factors, and personnel changes. To meet these challenges, it was critical that we identify our business-knowledge sources from the various pre-merger Compaq groups. Most critically, we identified our primary action for success--"streamlining" the process. Hence, the idea of a multi-state joint audit was born.

Approaching the MTC--How the Audit Program Works

Once HP developed the idea of having the Multistate Tax Commission conduct closeout audits for most states, HP reached out to professional associations and outside advisers who had experience with the MTC. We received generally positive feedback, which encouraged us to make an initial call to the MTC on a "no-name" basis. It seemed that an MTC audit would be a reasonable way to proceed, so we called the MTC again, identified ourselves, and set up an appointment in early October 2002 at the MTC's offices in Chicago to discuss this possibility further.

Les Koenig, MTC's Director...