Contract analysis

I. EXECUTIVE SUMMARY This memorandum analyzes the state income and franchise tax implications for Arbor Health Technologies Inc. ("AHT" or the "Company") across the Company's ten nexus states in connection with its proposed initial public offering (the "IPO") of shares of its common stock on the New York Stock Exchange (proposed ticker symbol: ARHT), SEC File Number 333-276841. The analysis addresses both the existin

1. Nexus analysis and filing obligations — A state-by-state review of the Company's basis for nexus in each of its ten filing states, including both traditional physical presence nexus and post-South Dakota v. Wayfair economic nexus standards as applied by each state for income and franchise tax purposes.

2. State-level treatment of IPO equity issuance proceeds — An analysis confirming that proceeds from the issuance of the Company's own stock are not includable in taxable income for state income tax purposes, with attention to specific state variations, including the impact on the New York business capital base.

3. Income apportionment considerations — A review of the Company's apportionment methodology across its nexus states, with particular attention to market-based sourcing of SaaS revenue and the potential effects of revenue growth on state-by-state apportionment percentages.

4. Withholding obligations on equity compensation exercises and settlements post-IPO — An analysis of the Company's state income tax withholding obligations arising from post-IPO exercises of stock options under the 2014 Stock Incentive Plan, vesting and settlement of restricted stock units under the 2024 Equity Incentive Plan, purchases under the 2024 Employee Stock Purchase Plan, and the impact of Section 83(b) ele

5. Franchise tax implications — An analysis of the Delaware franchise tax, New York capital base tax, Texas franchise (margin) tax, and Pennsylvania capital stock/franchise tax implications of the IPO and the resulting changes in the Company's capital structure.

6. Potential additional nexus exposures arising from the IPO — Identification of risk areas where the Company's post-IPO growth, hiring, and acquisition activities may create nexus in additional states.

7. Recommendations — Specific action items for the Company to address prior to and following the closing of the IPO. This memorandum does not address sales and use tax, property tax, unclaimed property or escheat obligations, or payroll tax matters other than state income tax withholding on equity compensation income. A separate memorandum, dated January 22, 2024, addresses the federal Section 382 ownership change an

II. BACKGROUND AND FACTUAL ASSUMPTIONS The analysis in this memorandum is based on the following factual background and assumptions, which have been derived from information provided by AHT management, review of the Company's draft Registration Statement on Form S-1 and the amendment thereto, review of the Company's organizational documents, and discussions with the Company's Chief Financial Officer, David Halderman,

Section 83(b) Elections. Fourteen current employees of the Company received restricted stock grants during the period from 2021 through 2022 and timely filed elections under Section 83(b) of the Code with the Internal Revenue Service within 30 days of the date of each respective grant. As a result, these employees recognized ordinary income equal to the fair market value of the restricted stock at the time of grant,

III. STATE-BY-STATE NEXUS ANALYSIS AND FILING STATUS Introductory Note AHT currently files income and/or franchise tax returns in ten states based on physical presence, economic nexus, and/or factor presence thresholds established under each state's applicable law. This section provides a state-by-state analysis of the basis for the Company's nexus in each of these ten filing states, the applicable tax type and rate,

I. New Jersey Nexus Basis. AHT has nexus with the State of New Jersey based on the presence of employees, including remote workers, in the state. In addition, AHT satisfies New Jersey's bright-line economic nexus standards, which establish nexus for corporations with either (i) $100,000 or more of New Jersey-source receipts, or (ii) 200 or more separate transactions delivered into New Jersey during the tax year. Tax

IV. STATE-LEVEL TREATMENT OF IPO EQUITY ISSUANCE PROCEEDS A. General Principles The fundamental question addressed in this section is whether the proceeds received by AHT from the issuance and sale of its common stock in the IPO will be subject to state income or franchise taxes in any of the Company's ten nexus states. The analysis is straightforward in most respects, but several nuances and state-specific considera

V. WITHHOLDING OBLIGATIONS ON EQUITY COMPENSATION POST-IPO A. Overview of Issue The closing of the IPO will create a liquid public market for AHT's common stock (NYSE: ARHT), enabling holders of vested stock options to exercise their options and immediately sell shares (a "same-day sale" or "exercise and sell" transaction). The IPO will also establish a publicly quoted fair market value for the Company's common stock

1. Massachusetts. Massachusetts requires withholding at the Commonwealth's flat individual income tax rate of 5.0% on the "spread" at exercise (for NQSOs, the excess of fair market value over the exercise price at the time of exercise) and on the fair market value at vesting (for RSUs, the fair market value of the shares delivered upon settlement). Withholding applies to Massachusetts-resident employees on their worl

2. New York New York requires withholding at the applicable New York State graduated withholding rates on equity compensation income. For employees who are residents of New York City, the combined state and city withholding rate can reach approximately 10.9% for the highest earners, reflecting both the New York State rate (up to 10.9% for taxable income over $25,000,000) and the New York City rate (up to 3.876%). New

3. California. California requires withholding on equity compensation income at the applicable California supplemental withholding rate of 10.23% for supplemental wages, or at the rate determined under the aggregate method if that method is applied. California is widely regarded as having among the most aggressive sourcing rules for stock option and equity compensation income of any state. Under California Franchise

4. Illinois. Illinois requires withholding at the state's flat individual income tax rate of 4.95% on equity compensation income recognized by Illinois-resident employees. For non-resident employees, Illinois generally does not tax compensation earned for services performed outside the state. Accordingly, non-resident employees who did not perform services in Illinois during the relevant vesting or service period sho

5. Pennsylvania. Pennsylvania requires withholding at the Commonwealth's flat individual income tax rate of 3.07% on equity compensation income, including the spread at exercise (for NQSOs) and the fair market value at vesting (for RSUs). Pennsylvania treats stock option income as compensation subject to the personal income tax. Pennsylvania's flat rate and relatively straightforward sourcing rules make the withholdi

6. Ohio. Ohio does not impose a traditional state-level individual income tax withholding requirement on employers in the same manner as most other income tax states. However, Ohio municipalities impose local income taxes (administered by Regional Income Tax Agency ("RITA"), Central Collection Agency ("CCA"), and individual municipal tax departments), and employers with employees located in Ohio municipalities may ha

7. New Jersey New Jersey requires withholding at the state's graduated individual income tax rates, which range up to 10.75% for the highest income earners (taxable income over $1,000,000). Equity compensation income is treated as wages subject to New Jersey withholding. For non-resident employees, New Jersey sources stock option income based on the proportion of services performed in New Jersey during the applicable

8. Georgia. Georgia requires withholding at the state's graduated individual income tax rates, which range up to 5.75% (reducing to 5.39% for tax year 2024). Georgia applies a standard service-period allocation method for sourcing equity compensation income to Georgia for non-resident employees, based on the ratio of Georgia workdays to total workdays during the applicable vesting or service period. D. Multi-State Al