1003-00004 · Harrowgate Private Equity Fund IV LP · Diligence/Tax

salt-considerations-memo.docx DOCUMENT M&A / Corporate

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

TO: Oliver Mackenzie, Responsible Partner, M&A, Calderwood & Harkness LLP Jonah Whitfield, Principal, Harrowgate Capital Partners LLC Rebecca Talmadge, Partner, Head of Consumer & Retail, Harrowgate Capital Partners LLC

FROM: Sylvia Hartwell, Specialist Partner, Tax, Calderwood & Harkness LLP

DATE: March 30, 2025

RE: State & Local Tax Considerations — Acquisition of Pennfield Holdings, Inc. (Project Summit)

MATTER NO.: 1003-00004

CONFIDENTIALITY LEGEND: This memorandum constitutes privileged and confidential attorney work product prepared by Calderwood & Harkness LLP in connection with the proposed acquisition of Pennfield Holdings, Inc. by Harrowgate Private Equity Fund IV LP. The analyses, conclusions, and recommendations contained herein are protected by the attorney-client privilege and the work product doctrine. This memorandum is intended solely for the use of the individuals and entities identified above and on the distribution list appended hereto. Any dissemination, distribution, or copying of this memorandum, in whole or in part, without the prior written authorization of Calderwood & Harkness LLP is strictly prohibited. If you have received this memorandum in error, please notify the sender immediately and destroy all copies.

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I. Executive Summary

This memorandum analyzes the state and local tax ("SALT") implications of the proposed acquisition by Harrowgate Private Equity Fund IV LP ("HPE Fund IV") of Pennfield Holdings, Inc. ("Pennfield" or the "Company," Nasdaq: PNFD) in a transaction valued at approximately $980,000,000 (the "Transaction" or the "Acquisition"). The Transaction is structured as a reverse triangular merger under Section 251 of the Delaware General Corporation Law ("DGCL"), pursuant to which Pinnacle Merger Sub, Inc. ("Merger Sub"), a newly formed Delaware corporation and wholly owned subsidiary of HPE Fund IV, will merge with and into Pennfield, with Pennfield surviving the merger as a wholly owned subsidiary of HPE Fund IV (the "Surviving Corporation"). Following the consummation of the Transaction, the Company will be taken private and delisted from the Nasdaq Global Select Market.

Pennfield is a Delaware corporation headquartered at 4500 Commerce Boulevard, Suite 800, Charlotte, North Carolina 28202. The Company operates a specialty consumer retail platform comprising 187 company-owned retail store locations and 22 outlet locations across 34 states, employing approximately 8,400 individuals. For its fiscal year ended January 31, 2025 ("FY 2024"), Pennfield reported consolidated revenue of $1,620,000,000, EBITDA of $142,000,000 (representing an 8.8% EBITDA margin), and net income of $54,300,000. The Company's fiscal year ends on January 31 of each calendar year.

Based upon our review of the available due diligence materials, applicable state and local tax laws, and discussions with the Harrowgate deal team, we have identified the following key SALT issues that warrant attention in connection with the Transaction:

(i) Nexus Footprint and Ongoing State Income/Franchise Tax Obligations. Pennfield maintains physical presence nexus in at least 34 states through its retail locations, distribution centers, and employee base, and likely has economic nexus in all 50 states and the District of Columbia as a result of its e-commerce operations. The Company currently files as a standalone C corporation in each jurisdiction where it has filing obligations, and the surviving entity will inherit the full scope of these filing obligations post-closing.

(ii) State Transfer and Stock Transfer Tax Exposure on the Merger. Several states impose real property transfer taxes or controlling-interest transfer taxes that may be triggered by the change in control of Pennfield effected through the reverse triangular merger, notwithstanding that no direct conveyance of real property occurs in the transaction. This exposure requires state-by-state analysis, with particular attention to New York, Connecticut, Maryland, Pennsylvania, and Washington.

(iii) Post-Closing Entity Restructuring for State Tax Efficiency. Following the closing of the Transaction, opportunities may exist to restructure the ownership chain for state tax efficiency, including the insertion of holding companies, intellectual property licensing arrangements, intercompany management fee structures, and intercompany debt pushdown strategies. These opportunities must be evaluated against increasingly aggressive state enforcement of economic substance requirements, addback statutes, and combined reporting mandates.

(iv) State-Level Treatment of the Management Rollover. Three members of Pennfield's senior management—Catherine Langford (CEO), Derek Simmons (CFO), and Maxwell Dunn (COO)—will contribute an aggregate of $21,500,000 in rollover equity to the post-closing ownership structure. The state tax treatment of these contributions must be analyzed to confirm tax-free treatment at the state level, particularly in North Carolina, where the rollover participants are presumed to reside.

(v) Apportionment Factor Impacts. The Transaction and any post-closing restructuring could affect the apportionment factors used to allocate Pennfield's taxable income across its filing states, with potential implications for the Company's overall state effective tax rate.

(vi) Unclaimed Property and Escheatment. Pennfield is subject to unclaimed property reporting obligations in all states in which it holds unredeemed gift cards, outstanding checks, uncashed payroll, and customer refunds. Delaware, as the state of incorporation, serves as the state of last resort for escheatment purposes.

(vii) State-Level Sales and Use Tax Compliance. Pennfield's retail and e-commerce operations create sales and use tax collection and remittance obligations across its operational footprint, and any compliance gaps identified during diligence should be addressed prior to or in connection with closing.

This memorandum should be read in conjunction with the Tax Structure Memorandum (Federal) dated March 28, 2025, and the Section 338(h)(10) Election Analysis dated March 29, 2025, both of which were prepared by the undersigned in connection with the Transaction. Additionally, the analysis set forth herein has been coordinated with Crestline Tax Advisors LLC ("Crestline"), Pennfield's external tax advisor, through Alan Fitzgerald, Managing Director, at 300 South Brevard Street, Suite 1500, Charlotte, North Carolina 28202. We have reviewed Crestline's work papers and state tax return files to the extent made available through the Project Summit data room hosted on the Thackeray Solutions platform.

The sections that follow address each of the foregoing SALT considerations in detail, together with our recommendations for further analysis and pre-closing action items.

II. Current Pennfield SALT Profile

A. State Income and Franchise Tax Nexus

Pennfield Holdings, Inc. (EIN: 82-4917305) is a corporation organized under the laws of the State of Delaware, with its principal executive offices located at 4500 Commerce Boulevard, Suite 800, Charlotte, North Carolina 28202. The Company has maintained its Delaware incorporation since its original formation and has been headquartered in Charlotte, North Carolina for the entirety of its operating history.

Physical Presence Nexus. Pennfield operates a total of 209 retail locations across 34 states, comprising 187 company-owned full-line retail stores and 22 outlet locations. Each of these retail locations constitutes a fixed place of business for purposes of establishing physical presence nexus under the applicable state income and franchise tax statutes. In addition to its retail store footprint, Pennfield maintains distribution centers, corporate offices, and other facilities that independently give rise to physical presence nexus in their respective jurisdictions. The Company employs approximately 8,400 individuals across its operations, with employees located in each of the 34 states in which it maintains retail locations as well as potentially in additional states through remote work arrangements for corporate and administrative staff.

The combination of owned and leased real property, tangible personal property (including inventory, fixtures, and equipment), and employees in each of these states creates substantial and continuous nexus for state income and franchise tax purposes. Under even the most conservative nexus standards, Pennfield's physical footprint clearly satisfies the constitutional requirements of the Due Process Clause and Commerce Clause of the United States Constitution as articulated by the Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and its progeny, and as superseded in relevant part by South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).

Economic Nexus. Beyond its physical presence in 34 states, Pennfield operates a significant e-commerce platform through which it sells merchandise to customers nationwide. Following the Supreme Court's decision in Wayfair, virtually all states with a sales tax—and, increasingly, states with an income tax—have enacted economic nexus provisions that impose filing obligations on entities exceeding specified thresholds of sales, transactions, or other economic activity within the state, irrespective of physical presence. Given Pennfield's consolidated revenue of $1,620,000,000 for FY 2024 and its nationwide e-commerce customer base, it is reasonable to conclude that the Company exceeds the applicable economic nexus thresholds in all 50 states and the District of Columbia. Accordingly, Pennfield likely has state income tax filing obligations in states where it does not maintain physical retail locations, to the extent those states impose a corporate income or gross receipts tax.

Current Filing Status. Based upon our review of the available data room materials, Pennfield currently files as a standalone C corporation in each state where it has an income or franchise tax filing obligation. The Company is not a member of any existing consolidated or combined filing group at the state level. This is consistent with its status as a publicly traded standalone entity with no corporate parent. Following the Transaction, Pennfield will become an indirect wholly owned subsidiary of HPE Fund IV, which may give rise to combined or unitary filing obligations with other entities in the Harrowgate organizational structure, as discussed in Section V.B below.

Delaware Franchise Tax. As a Delaware corporation, Pennfield is subject to the annual Delaware franchise tax, which is computed under either the authorized shares method or the assumed par value capital method, whichever results in a lower tax liability. Pennfield currently has 58,200,000 shares of common stock issued and outstanding on a basic basis, and 61,450,000 shares outstanding on a fully diluted basis (including outstanding stock options and restricted stock units). Following the Transaction, the surviving corporation's authorized shares and capital structure may be adjusted, which could affect the annual Delaware franchise tax computation. We recommend that the post-closing capital structure be reviewed in consultation with Delaware local counsel, Marsden & Holt LLP (Elizabeth Parrish, Partner), to optimize the franchise tax calculation.

B. Existing Filing Positions and Audit History

Data Room Review. In connection with the due diligence process for Project Summit, we have reviewed state income and franchise tax returns, correspondence, and audit files made available through the Thackeray Solutions data room platform. The data room contained Pennfield's state income tax returns for the three most recent fiscal years (FY 2022, FY 2023, and FY 2024), along with selected supporting work papers prepared by Crestline Tax Advisors LLC.

Open Audit Years and Pending Matters. Based on the statute of limitations applicable in each filing jurisdiction, the following general framework applies to Pennfield's open audit years: most states have a three- or four-year statute of limitations for assessment of income tax deficiencies, measured from the later of the original return due date or the date of filing. Given Pennfield's January 31 fiscal year-end, the Company's FY 2021 and subsequent fiscal years are generally open for assessment in most jurisdictions. In states that provide for an extended statute of limitations (e.g., six years for substantial understatements of income), FY 2019 and subsequent years may also remain open.

We have identified from the data room materials several open state tax audit examinations and other pending matters that require further investigation. These matters should be the subject of detailed inquiry directed to Pennfield's General Counsel, Patricia Okafor, and to Crestline, as part of the ongoing due diligence process. The due diligence team members—Ryan Kowalski and Megan Chu of Calderwood & Harkness LLP—have been advised to include specific requests for all state tax audit files, correspondence, assessments, closing agreements, and voluntary disclosure agreements in the supplemental diligence request list.

Any outstanding state tax assessments, pending audit adjustments, or accrued but unpaid state tax liabilities should be reflected in the Target's closing balance sheet and should be addressed in the indemnification and disclosure schedule provisions of the Merger Agreement. The interaction between these pre-closing state tax liabilities and the representations and warranties insurance policy is discussed in Section IX below.

Audited Financial Statements. Pennfield's independent auditor, Pemberton & Associates LLP, under the direction of Kevin Tarrant Corporation, Lead Audit Partner, has audited the Company's consolidated financial statements for FY 2024. The audited financial statements reflect state income tax provisions computed in accordance with ASC 740 (Income Taxes), including the measurement of deferred tax assets and liabilities and the evaluation of uncertain tax positions. We have reviewed the state income tax provision work papers to the extent made available and note that the Company has recorded a reserve for uncertain tax positions related to certain state filing positions. The specific nature and amount of these reserves require further confirmation from Crestline and Pemberton & Associates.

C. State Apportionment Methodology

Pennfield's consolidated revenue of $1,620,000,000 for FY 2024 is apportioned across its filing states using the apportionment formulas prescribed by each state's tax code. The trend across the states over the past two decades has been a movement toward single-sales-factor apportionment, and the majority of states in which Pennfield files have adopted a single-sales-factor formula or a formula that heavily weights the sales factor. In states that continue to employ a traditional three-factor formula (sales, property, and payroll, equally weighted or with a double-weighted sales factor), Pennfield's extensive retail location footprint, distribution center network, and employee base will result in significant property and payroll factor numerators in those states, potentially increasing the Company's apportionable income in those jurisdictions relative to a single-sales-factor state.

Key States by Revenue Concentration. North Carolina, as the headquarters state and home to major distribution operations, is expected to represent a substantial share of Pennfield's apportioned income. Other states with major retail presence—which we anticipate include states such as Texas, Florida, California, New York, New Jersey, Pennsylvania, Ohio, Illinois, Georgia, and Virginia, based on the distribution of the Company's 209 retail and outlet locations—will also claim significant apportionment shares. The precise revenue concentration by state requires further analysis based on the state-by-state revenue data in the Project Summit data room. We have requested store-level revenue data from Pennfield's finance team to complete this analysis.

Impact of Post-Closing Restructuring on Apportionment. Any post-closing restructuring—including the insertion of holding companies, intellectual property entities, or management companies—will affect the composition and magnitude of the apportionment factors in each filing state. For example, if intercompany royalty payments are made by the operating entity to an IP holding company, the operating entity's sales factor numerator in each state may remain unchanged, but its net income subject to apportionment will be reduced by the royalty deduction (to the extent deductible under applicable state law). Conversely, the IP holding company may have nexus and filing obligations in states where Pennfield operates if the states take the position that the IP holding company is part of a unitary group or has economic nexus through the receipt of royalty income sourced to those states.

D. Sales and Use Tax

Pennfield collects and remits state and local sales tax on retail transactions conducted at its 209 physical store locations in accordance with the sales tax laws of each applicable jurisdiction. For e-commerce sales, the Company applies destination-based sourcing rules consistent with the requirements of each state's economic nexus provisions, collecting tax based on the delivery address of the customer.

Given the Company's nationwide e-commerce operations and FY 2024 revenue of $1,620,000,000, Pennfield likely exceeds the economic nexus thresholds for sales tax collection in all 45 states (and the District of Columbia) that impose a general sales tax. We understand from the data room materials that Pennfield uses an automated tax calculation engine (tax technology platform) integrated with its point-of-sale and e-commerce systems to compute, collect, and remit sales tax.

During due diligence, we have identified the need for further investigation into (i) any open sales tax audit examinations, (ii) any voluntary disclosure agreements that the Company has entered into with state taxing authorities to remediate prior periods of non-collection or non-remittance, and (iii) the Company's compliance with product-level taxability determinations (including, for example, the taxability of clothing and accessories in states with clothing exemptions or tax holidays). The due diligence team has included these items in the supplemental request list.

Any pre-closing sales tax liabilities, including potential exposure from audits or compliance gaps, should be quantified and addressed in the disclosure schedules to the Merger Agreement and factored into the purchase price or indemnification provisions, as appropriate.

E. Unclaimed Property / Escheatment

Pennfield is subject to unclaimed property (escheatment) reporting obligations in all 50 states and the District of Columbia. As a national retailer, the Company holds range property types that are commonly subject to escheatment, including:

• Unredeemed gift cards and store credits (subject to varying treatment by state; several states exempt gift cards from escheatment, while others treat unredeemed balances as reportable unclaimed property after a specified dormancy period);

• Outstanding checks, including accounts payable checks, vendor refunds, and customer refund checks that remain uncashed after the applicable dormancy period;

• Uncashed payroll checks and unclaimed wages;

• Customer refunds, credits, and overpayments;

• Unclaimed dividends (for the period during which Pennfield was publicly traded and paying dividends, if applicable); and

• Other intangible property held for the benefit of third parties.

Under the priority rules established by the Supreme Court in Texas v. New Jersey, 379 U.S. 674 (1965), and Delaware v. New York, 507 U.S. 490 (1993), unclaimed intangible property is escheatable, first, to the state of the owner's last known address as reflected in the holder's records, and, second (if the holder's records do not reflect the owner's last known address or if the owner's last known address is in a state that does not provide for escheatment of the property at issue), to the state of the holder's incorporation. Because Pennfield is incorporated in Delaware, the State of Delaware serves as the state of last resort for escheatment of any intangible property for which the Company's records do not reflect the owner's last known address. Delaware has been notably aggressive in its enforcement of unclaimed property laws, including through the use of third-party audit firms operating under contingency fee arrangements.

We recommend that Pennfield's unclaimed property compliance be reviewed as part of the diligence process, including the adequacy of the Company's reporting procedures, the completeness of its historical escheatment filings, and the existence of any pending unclaimed property audits or voluntary disclosure agreements. Any material unclaimed property exposure should be reflected in the Company's financial statements and addressed in the Merger Agreement.

III. State Transfer Tax and Documentary Stamp Tax Analysis

A. Overview of State Transfer Tax Regimes

A critical threshold question in any M&A transaction is whether the transaction structure triggers state or local transfer taxes, real estate transfer taxes, or documentary stamp taxes. These taxes, which are generally imposed on the conveyance of real property or interests therein, can represent a significant and often overlooked transaction cost. The applicable tax rates, exemptions, and triggering events vary widely from state to state, and the analysis requires a careful review of the specific transaction mechanics against the statutory provisions in each jurisdiction where the target entity holds interests in real property.

In the Transaction, Pinnacle Merger Sub, Inc. (EIN: 93-4081562) will merge with and into Pennfield under DGCL § 251, with Pennfield surviving as the wholly owned subsidiary of HPE Fund IV. By operation of the reverse triangular merger, the stockholders of Pennfield will surrender their shares of Pennfield common stock in exchange for the per-share merger consideration of $15.95 in cash (subject to the management rollover described herein), and the shares of Merger Sub stock held by HPE Fund IV will be converted into shares of the surviving corporation. Critically, in this structure:

• No direct transfer of real property occurs. Pennfield continues to hold all of its assets, including any owned real property, in the same legal entity before and after the merger.

• No deed or other instrument of conveyance is executed or recorded with respect to any real property held by Pennfield.

• The legal title to all real property held by Pennfield remains in the name of Pennfield Holdings, Inc. (the surviving corporation) without interruption.

In most jurisdictions, the absence of a direct conveyance of real property means that traditional real property transfer taxes are not triggered by the Transaction. However, a growing number of states have enacted "controlling interest" transfer tax provisions that treat a transfer of a controlling interest (typically defined as 50% or more of the ownership interests) in an entity that holds real property as a taxable event, irrespective of whether the underlying real property is directly conveyed. These controlling-interest provisions are specifically designed to capture changes of control effected through entity-level transactions such as mergers, stock purchases, and membership interest transfers, and they will be implicated in the Transaction because HPE Fund IV will acquire 100% of the equity of Pennfield by operation of the merger.

The analysis below addresses the transfer tax implications in key jurisdictions on a state-by-state basis.

B. Key State-by-State Transfer Tax Analysis

Delaware. The State of Delaware does not impose a general transfer tax on mergers or other corporate reorganizations. Delaware's real property transfer tax (codified at 30 Del. C. § 5401 et seq.) is imposed on the transfer of real property by deed or other instrument of writing, and the reverse triangular merger does not involve the execution or recording of a deed with respect to any Delaware real property. Accordingly, we do not anticipate any Delaware transfer tax or documentary stamp tax liability arising from the Transaction. To the extent Pennfield holds any real property in Delaware (which we have not identified from the data room materials), the absence of a direct conveyance should shield the Transaction from Delaware real property transfer tax.

North Carolina. North Carolina imposes an excise tax on the conveyance of real property at the rate of $1.00 per $500 of consideration (or fractional part thereof), commonly referred to as the "revenue stamps" or "excise stamps" tax, codified at N.C. Gen. Stat. § 105-228.30. This tax is imposed on instruments that convey an interest in real property, and the taxable event is the recording of the instrument with the county register of deeds. In a reverse triangular merger where Pennfield survives and retains legal title to its real property, no instrument of conveyance is typically executed or recorded, and therefore the excise tax should not be triggered.

However, careful analysis is required with respect to the Company's Charlotte headquarters. The headquarters at 4500 Commerce Boulevard, Suite 800, Charlotte, North Carolina 28202, is understood to be leased premises rather than owned real property. This understanding is based on preliminary information from the data room, but should be confirmed through the real estate diligence workstream. If Pennfield owns any real property in North Carolina—whether the headquarters, distribution center facilities, or other properties—the North Carolina excise tax analysis must be revisited. North Carolina does not currently have a controlling-interest transfer tax provision, and therefore a change in ownership of the entity holding the real property (without a direct conveyance) should not independently trigger the excise tax. Nonetheless, we recommend confirmation from North Carolina local counsel on this point, given that the North Carolina Department of Revenue has periodically considered the application of the excise tax to entity-level transactions.

New York. New York presents the most significant transfer tax exposure in connection with the Transaction due to the breadth and complexity of its real property transfer tax regime. The analysis involves two distinct levies:

New York State Real Property Transfer Tax. The New York State real property transfer tax ("RPTT"), codified at N.Y. Tax Law § 1402, is imposed on conveyances of real property or interests therein where the consideration exceeds $500. The tax rate is $2.00 per $500 of consideration (0.4%) for residential property and $2.00 per $500 of consideration for commercial property. Critically for the Transaction, New York Tax Law § 1401(e) defines "conveyance" to include the transfer or acquisition of a "controlling interest" in any entity that holds an interest in real property. A "controlling interest" is defined as 50% or more of the total combined voting power of all classes of stock of a corporation, or 50% or more of the capital, profits, or beneficial interest in a partnership, association, or other unincorporated entity. Because the Transaction will result in HPE Fund IV acquiring 100% of the stock of Pennfield (the surviving corporation), the controlling-interest provisions will be triggered in New York if Pennfield holds any interest in New York real property—including as a lessee under a lease with a remaining term (including renewal options) of 49 years or more, which is treated as an interest in real property under N.Y. Tax Law § 1401(e)(1)(iii).

New York City Real Property Transfer Tax. In addition to the state RPTT, New York City imposes its own real property transfer tax (NYC Admin. Code §§ 11-2101 et seq.) on conveyances of real property located within the five boroughs. The NYC RPTT rates for commercial property are 1.425% for consideration exceeding $500,000 and 2.625% for consideration of $500,000 or less. The NYC RPTT also contains controlling-interest provisions that parallel the state provisions. Furthermore, the so-called "mansion tax" under N.Y. Tax Law § 1402-a imposes an additional 1% tax on residential real property conveyances where the consideration exceeds $1,000,000, though this is unlikely to apply in the context of a commercial retail operation.

Quantification. The magnitude of Pennfield's New York transfer tax exposure depends entirely on whether the Company holds any interest in real property located in New York State or New York City. If Pennfield operates retail locations in New York on leased premises with lease terms of less than 49 years (including renewal options), those leasehold interests may not constitute interests in "real property" for purposes of the controlling-interest transfer tax. However, if Pennfield holds any fee ownership interest in New York real property, or holds long-term leases that meet the 49-year threshold, the transfer tax exposure could be material, calculated based on the proportionate share of the consideration allocable to the New York real property. We are currently reviewing the Real Estate & Lease Portfolio Summary from the data room to identify all New York properties and their ownership and lease terms.

Other States with Controlling-Interest Transfer Tax Provisions. In addition to New York, several other states have enacted controlling-interest transfer tax or change-of-ownership transfer tax provisions that may be implicated by the Transaction. The following states require analysis:

• Connecticut: Connecticut imposes a real estate conveyance tax (Conn. Gen. Stat. § 12-494 et seq.) that includes a controlling-interest transfer tax provision. A transfer of a controlling interest (50% or more) in an entity that holds Connecticut real property is treated as a conveyance subject to the tax. The applicable rate varies by municipality but generally ranges from 0.75% to 1.25% of the consideration allocable to the Connecticut real property.

• Maryland: Maryland imposes a transfer tax and recordation tax on transfers of real property, including transfers of controlling interests in entities holding Maryland real property. The transfer tax rate is 0.5% of consideration (state level), with additional county-level transfer taxes that vary by county. The recordation tax is imposed at the rate of $5.00 per $500 ($7.00 per $500 in certain counties). The controlling-interest provisions apply to transfers of 80% or more of the interests in an entity holding Maryland real property.

• Pennsylvania: Pennsylvania imposes a realty transfer tax at a combined state and local rate that can exceed 4% in Philadelphia. Pennsylvania's controlling-interest provisions (72 P.S. § 8102-C.3) treat a transfer of 90% or more of the interests in an entity holding Pennsylvania real property as a transfer subject to the realty transfer tax. The 90% threshold is unique among states and is more favorable to acquirers than the 50% threshold used in other jurisdictions; however, because HPE Fund IV will acquire 100% of Pennfield's stock, the 90% threshold will be exceeded.

• Washington: Washington State imposes a real estate excise tax (REET) at graduated rates on transfers of real property, including transfers of controlling interests in entities holding Washington real property. The controlling-interest provisions are codified at RCW § 82.45.010 and define a controlling interest as 50% or more. The REET rates range from 1.1% to 3.0% depending on the value of the real property.

• Additional States: Other states that may impose controlling-interest transfer taxes or similar levies include, but are not limited to, California (limited to certain county-level documentary transfer taxes in jurisdictions that have adopted charter city provisions), Florida, Michigan, and Vermont. Each of these states must be analyzed based on Pennfield's specific real property holdings within the state.

Aggregate Transfer Tax Exposure. At this stage, we are unable to quantify the aggregate transfer tax exposure with precision because the analysis depends on (i) the identification of all states in which Pennfield holds owned real property (as opposed to leased premises), (ii) the determination of the fair market value of such owned real property, (iii) the allocation of the aggregate merger consideration among the real property interests in each state, and (iv) the application of the specific controlling-interest provisions in each state (including applicable thresholds, rates, and exemptions). We anticipate that the aggregate transfer tax exposure will be a component of the estimated transaction costs, which are currently budgeted at approximately $60,000,000. The completion of the state-by-state analysis is identified as a priority action item in Section X below.

C. Mitigation Strategies

Several potential mitigation strategies are available to reduce or eliminate the Transaction's state transfer tax exposure:

Reliance on Reverse Triangular Merger Structure. The primary structural argument is that the reverse triangular merger—in which Pennfield survives as the continuing legal entity and retains title to all of its assets, including real property—does not constitute a "conveyance" or "transfer" of real property under the traditional real property transfer tax statutes in most jurisdictions. This argument is strongest in states that do not have controlling-interest transfer tax provisions, where the absence of a recorded deed or other instrument of conveyance should be dispositive.

Controlling-Interest Provisions. In states that have enacted controlling-interest transfer tax provisions, the reverse triangular merger structure will not provide insulation from the tax, because the acquisition of 100% of Pennfield's stock by HPE Fund IV clearly constitutes a transfer of a controlling interest. In these states, the focus shifts to identifying the scope and magnitude of the exposure and evaluating whether any exemptions or exclusions are available. For example, certain states exempt transfers between related entities or transfers pursuant to corporate reorganizations from controlling-interest transfer taxes, though these exemptions are narrowly construed and may not apply to a third-party acquisition such as the Transaction.

Pre-Closing Restructuring. In theory, transfer tax exposure in controlling-interest transfer tax states could be reduced by transferring owned real property from Pennfield to a separate entity prior to the merger, so that the entity whose controlling interest is being transferred (Pennfield) no longer holds the real property at the time of the transfer. However, this strategy carries significant risks: (i) the transfer of real property from Pennfield to a separate entity would itself be a taxable conveyance in most jurisdictions, merely accelerating the transfer tax liability; (ii) many states have anti-avoidance provisions that look through pre-closing restructurings effected in anticipation of a change of control; and (iii) the complexity and timeline required to effectuate a pre-closing real property restructuring may be incompatible with the Transaction timeline and closing conditions. Accordingly, we do not recommend pursuing a pre-closing real property restructuring absent a compelling economic justification based on the magnitude of the transfer tax exposure identified in the state-by-state analysis.

Allocation of Transfer Tax Liability. The Merger Agreement should address the allocation of transfer tax liability between the buyer and the seller. It is customary in take-private transactions for the buyer to bear the cost of transfer taxes imposed on the Transaction, but this is a negotiated point. We recommend that the deal team confirm the allocation of transfer taxes in the Merger Agreement and ensure that the estimated transfer tax exposure is included in the buyer's transaction cost budget.

IV. State Income Tax Consequences of the Merger

A. Treatment of Merger Consideration Paid to Pennfield Stockholders

In the Transaction, the public stockholders of Pennfield will receive cash merger consideration of $15.95 per share in exchange for their shares of Pennfield common stock. The receipt of this cash consideration will be a taxable event for the stockholders, who will recognize gain or loss equal to the difference between the cash consideration received and their adjusted tax basis in their Pennfield shares. The state income tax consequences of this gain or loss flow to the individual stockholders based on their respective states of residence and are not a direct tax liability of Harrowgate, HPE Fund IV, the Merger Sub, or the surviving Pennfield entity.

However, the Transaction may give rise to state withholding obligations that must be administered by the paying agent. Certain states—most notably California—require withholding on payments to non-resident stockholders in connection with the acquisition of stock or assets of a business entity operating within the state. Under California Revenue & Taxation Code § 18662, for example, a buyer or withholding agent may be required to withhold a specified percentage of the total sale price allocable to California from payments to non-California resident sellers. Similar provisions exist in other states, though they are less commonly enforced in the context of publicly traded company mergers where the identity and residency of individual stockholders are not readily ascertainable by the paying agent.

We recommend that the deal team coordinate with Marlowe Asset Management Stock Transfer, Inc. (Daniel Roth, Vice President, Corporate Actions), which will serve as the paying agent for the Transaction, to evaluate whether any state withholding obligations apply and, if so, to implement appropriate withholding procedures. Given the complexity of administering state withholding across a diffuse public stockholder base, it may be necessary to obtain specific guidance from the relevant state taxing authorities or to apply for withholding waivers where available.

B. Treatment of Management Rollover

Three members of Pennfield's senior management team will participate in a management rollover in connection with the Transaction, pursuant to which they will contribute a portion of their equity consideration into the post-closing ownership structure in exchange for equity interests in the surviving entity or its parent:

The aggregate management rollover of $21,500,000 represents approximately 2.2% of the total equity value of $980,000,000. The rollover is expected to be structured at the federal level as a tax-free contribution of property (Pennfield shares or the right to receive merger consideration) in exchange for partnership or LLC interests in a partnership or LLC entity in the post-closing ownership chain, qualifying for non-recognition treatment under IRC § 721 (for contributions to partnerships) or IRC § 351 (for contributions to corporations), as applicable. The specific structure of the rollover vehicle and the applicable federal non-recognition provision are addressed in the Tax Structure Memorandum (Federal) dated March 28, 2025.

State Tax Conformity. For state income tax purposes, the critical question is whether the states in which the rollover participants are subject to income tax conform to the applicable federal non-recognition provision. Most states that impose an income tax use federal taxable income (or federal adjusted gross income, for individuals) as the starting point for the computation of state taxable income and generally conform to the federal treatment of contributions under IRC § 721 or § 351. Accordingly, to the extent the rollover qualifies for non-recognition treatment at the federal level, the same treatment should be respected at the state level in most jurisdictions.

North Carolina. North Carolina, as the state of Pennfield's headquarters and the presumed state of residence of Langford, Simmons, and Dunn, is the most significant jurisdiction for purposes of this analysis. North Carolina generally conforms to the Internal Revenue Code as of a specified date (rolling conformity with certain decoupled provisions) for purposes of computing state taxable income. Specifically, North Carolina conforms to the federal treatment of non-recognition transactions under IRC §§ 351 and 721, and we do not anticipate that the management rollover will trigger North Carolina income tax for the participating executives, provided the federal non-recognition requirements are satisfied. However, the precise conformity date and any North Carolina-specific modifications should be confirmed at the time of the rollover.

Non-Conforming States. If any rollover participant is a resident of, or subject to tax in, a state that does not conform to the applicable federal non-recognition provision—or that has enacted modifications that limit the scope of non-recognition treatment for certain types of contributions—the participant could face state-level gain recognition on the rollover transaction. We are not currently aware of any such non-conformity issues affecting Langford, Simmons, or Dunn, but this should be confirmed once the rollover structure and the participants' states of residence are finalized. Additionally, if any rollover participant relocates to a different state between now and the closing date, the analysis will need to be updated.

C. Impact on Pennfield's State Tax Attributes

State Net Operating Losses. Pennfield may have state net operating loss ("NOL") carryforwards in one or more filing states. The Transaction will result in an "ownership change" of Pennfield for purposes of IRC § 382, as HPE Fund IV will acquire 100% of Pennfield's stock. Most states conform to the federal IRC § 382 limitation on the use of pre-change NOLs following an ownership change, which limits the annual use of pre-change NOLs to the product of the value of the loss corporation immediately before the ownership change multiplied by the applicable long-term tax-exempt rate. However, the state-level application of § 382 can vary:

• Some states apply § 382 on a consolidated or combined basis, which may produce a different limitation amount than the federal computation.

• Some states impose their own, more restrictive limitations on the use of NOL carryforwards independent of § 382 (e.g., percentage-of-income limitations, dollar caps, or suspension periods).

• A few states do not permit NOL carryforwards at all, rendering the § 382 analysis moot in those jurisdictions.

The quantification of Pennfield's state NOL carryforwards and the application of § 382 limitations at the state level is a priority item for the due diligence team. Ryan Kowalski and Megan Chu have been instructed to request from Pennfield a state-by-state schedule of NOL carryforwards, including carryforward periods and any existing § 382 limitations from prior ownership changes.

State Tax Credits. Pennfield may hold state-level tax credits, including research and development credits, investment tax credits, and job creation credits, in various states. The transferability and survival of these credits post-merger must be assessed on a state-by-state basis. In some states, tax credits are personal to the taxpayer and cannot be transferred, while in others they may be assigned or may survive a change of control if the entity continues to exist (as it does in a reverse triangular merger, where Pennfield is the surviving corporation). We recommend a comprehensive inventory of all state tax credits and an analysis of their post-Transaction status.

Delaware Franchise Tax. The surviving entity will continue to be a Delaware corporation following the Transaction, and accordingly, the annual Delaware franchise tax obligation will continue without interruption. As noted above, the post-closing capital structure should be reviewed to optimize the franchise tax computation under the authorized shares or assumed par value capital method.

V. Post-Closing Entity Structuring for State Tax Efficiency

A. Holding Company Structure

Following the closing of the Transaction, the ownership chain for Pennfield will be as follows: Pennfield Holdings, Inc. (the surviving Delaware corporation) will be a wholly owned subsidiary of HPE Fund IV, a Delaware limited partnership. HPE Fund IV's general partner is Harrowgate Capital Partners IV GP LLC, a Delaware limited liability company, and the investment manager is Harrowgate Capital Partners LLC, a Delaware limited liability company headquartered at 1200 Market Street, Suite 3100, Wilmington, Delaware 19801.

We recommend evaluating the insertion of one or more intermediate entities between HPE Fund IV and the surviving Pennfield entity to facilitate state tax-efficient management of intercompany transactions and to provide structural flexibility for potential future dispositions or restructurings. Specifically, the following structures warrant consideration:

Delaware Holding Company. A Delaware holding company could be inserted between HPE Fund IV and Pennfield to serve as a holding and financing vehicle. This entity could hold the equity interests in Pennfield and could serve as the borrower or guarantor under the credit facilities, facilitating the pushdown of acquisition debt to the operating level. Delaware does not impose a corporate income tax on entities whose activities within the state are limited to maintaining their legal existence, holding equity interests in subsidiaries, and receiving dividends or other investment income. Accordingly, a Delaware holding company may be able to receive dividends, management fees, or interest income from Pennfield without incurring Delaware corporate income tax (though the entity would remain subject to the Delaware franchise tax).

IP Holding Company. The creation of a separate entity to hold and license Pennfield's trademarks, trade names, trade dress, and other intellectual property back to the operating entity has been a common state tax planning strategy employed by national retailers. Under this structure, the IP holding company receives royalty payments from the operating entity in exchange for the license of the intellectual property, and the royalty payments reduce the operating entity's taxable income in its filing states. The IP holding company, if domiciled in a jurisdiction that does not impose an income tax on royalty income (or imposes a favorable tax), may achieve a lower effective tax rate on the royalty income than the operating entity would have achieved on the equivalent operating income.

However, the effectiveness of this strategy has been substantially eroded over the past two decades as states have enacted "addback" statutes that require taxpayers to add back to their state taxable income any royalty payments, management fees, or interest expenses paid to related parties, unless the taxpayer can demonstrate that the payments have economic substance and are made at arm's length. As of March 2025, the majority of states in which Pennfield files have adopted some form of addback statute or related-party expense disallowance rule. Additionally, in states with mandatory combined or unitary reporting (discussed below), the intercompany royalty payments would be eliminated in the combined return, negating the intended tax benefit.

Accordingly, while we do not foreclose the IP holding company strategy, we caution that its effectiveness is highly dependent on the specific state filing positions and the Company's ability to satisfy the economic substance and arm's-length pricing requirements in each state. A detailed state-by-state analysis of the addback statutes and their exceptions is a prerequisite to any implementation of this structure.

B. Combined / Unitary Filing Considerations

The addition of Pennfield to the Harrowgate portfolio raises the question of whether Pennfield will be required to file on a combined or unitary basis with other Harrowgate portfolio companies in states that mandate combined or unitary reporting. The determination of whether entities are engaged in a "unitary business" is a facts-and-circumstances inquiry that generally requires the presence of (i) common ownership (typically more than 50%), (ii) functional integration, centralized management, or economies of scale among the commonly owned entities, and (iii) flows of value among the entities.

Common Ownership. Following the Transaction, Pennfield and all other portfolio companies of HPE Fund IV will share common ownership through the fund. This satisfies the common ownership prong of the unitary business test. However, it is important to note that many states apply the unitary business test at the level of the specific entities in question, and common ownership through a private equity fund structure does not automatically render all portfolio companies unitary with one another. The determination depends on whether the portfolio companies share functional integration, centralized management, or economies of scale beyond the passive investment relationship maintained by the fund.

Functional Integration. Pennfield's retail operations are in the consumer and retail sector. If Harrowgate Capital Partners LLC holds other portfolio companies in the same or related sectors—and if those portfolio companies share management personnel, operational resources, supply chain infrastructure, back-office functions, or customer relationships with Pennfield—a state taxing authority could assert that the entities are engaged in a unitary business. The Harrowgate deal team should provide a list of existing HPE Fund IV portfolio companies and their operations so that we can assess the potential for unitary business determinations in each mandatory combined reporting state.

Key Combined Reporting States. The following states, among others, have adopted mandatory combined reporting regimes that could implicate Pennfield's filing position:

• California: Mandatory combined reporting for unitary groups (Cal. Rev. & Tax. Code § 25101 et seq.). California's water's-edge combined report includes all domestic members of the unitary group. California applies a single-sales-factor apportionment formula.

• Illinois: Mandatory combined reporting effective for tax years ending on or after December 31, 2022 (35 ILCS 5/1501(a)(27), as amended). Illinois requires the inclusion of all unitary members in a combined return.

• New York: New York requires combined reporting for corporations that are part of a combined group under N.Y. Tax Law § 210-C. The combined group includes all corporations that are commonly owned (more than 50%) and that meet the capital stock condition, the income/expense condition, or the group election condition.

• Texas: The Texas franchise (margin) tax requires combined reporting for all entities that are part of a combined group with more than 50% common ownership (Tex. Tax Code § 171.1014). The combined group must file a single combined report and apportion its taxable margin using a single-sales-factor formula.

• Other States: Additional states with mandatory combined reporting requirements include, but are not limited to, Connecticut, Massachusetts, Michigan, Minnesota, Montana, Nebraska, Oregon, Vermont, West Virginia, and Wisconsin. Each state's combined reporting rules must be analyzed individually to determine their applicability to the Harrowgate/Pennfield ownership structure.

The impact of combined reporting on Pennfield's state tax liability can be either positive or negative, depending on the relative profitability and apportionment factors of the entities included in the combined return. If other Harrowgate portfolio companies have losses or unfavorable apportionment factors in a given state, their inclusion in the combined return could reduce the group's aggregate state tax liability. Conversely, if the other portfolio companies have significant sales or other apportionment factors in a state where Pennfield's standalone liability was relatively low, the combined return could increase the aggregate tax burden.

C. Intercompany Debt and Interest Deductions

The Transaction will be financed in part through third-party debt, consisting of a $490,000,000 Term Loan B facility (bearing interest at SOFR plus 400 basis points, with a seven-year maturity) and a $150,000,000 Revolving Credit Facility (bearing interest at SOFR plus 350 basis points, with a five-year maturity), both provided by a syndicate led by Falconer National Bank, N.A. The combined debt facilities total $640,000,000 in committed capacity.

To the extent the acquisition debt is structurally positioned at or pushed down to the Pennfield operating entity level (or to an entity that is included in Pennfield's combined or unitary filing group), the interest expense on the debt will reduce Pennfield's state taxable income in states where the Company files income tax returns. Based on the current Term Loan B balance of $490,000,000 and an assumed all-in interest rate of approximately 4.0% (SOFR) plus 400 basis points (4.0%), or approximately 8.0% on a blended basis, the annual interest expense on the Term Loan B alone is estimated at approximately $39,200,000. If SOFR is assumed at its current prevailing rate of approximately 4.33%, the annual interest expense would be approximately $40,800,000. However, based on the reference in the deal materials to an estimated interest expense of $19,600,000, we note that the precise SOFR rate and the interest calculation methodology should be confirmed with the financing team; the $19,600,000 figure may reflect a lower assumed SOFR rate or a partial-year calculation. For purposes of this memorandum, we use the $19,600,000 annual interest expense estimate for the Term Loan B as provided by the deal team.

At the current leverage level of approximately 3.2x Net Debt / LTM EBITDA, the state deductibility of interest expense is a material planning consideration that directly affects the after-tax cost of the acquisition financing.

State-Level Interest Expense Limitations. The deductibility of interest expense at the state level is subject to multiple overlapping limitations:

IRC § 163(j) Conformity. At the federal level, IRC § 163(j) limits the deduction for business interest expense to the sum of business interest income plus 30% of adjusted taxable income (ATI). Most states conform to the federal § 163(j) limitation as part of their general conformity to the Internal Revenue Code, though some states have decoupled from the provision or apply it with modifications. The § 163(j) limitation applies to all business interest expense, including interest on third-party debt, and is not limited to related-party interest.

Related-Party Interest Addback Statutes. Separate from § 163(j), many states have enacted statutes that require taxpayers to add back to their state taxable income any interest expense paid to related parties (i.e., entities under common ownership or control). These addback statutes are designed to prevent the erosion of the state tax base through intercompany financing arrangements. To the extent the acquisition debt is pushed down to Pennfield through intercompany lending (e.g., a parent entity borrows from Falconer National Bank and on-lends to Pennfield at a comparable or higher rate), the interest payments from Pennfield to its parent would be treated as related-party interest and could be subject to addback in states with such provisions.

Most addback statutes provide exceptions where the taxpayer can demonstrate that (i) the related-party transaction has a valid business purpose and economic substance, (ii) the interest is paid at arm's length, and (iii) the related-party recipient is subject to tax on the interest income in another jurisdiction. The availability and scope of these exceptions vary by state.

State-Specific Limitations. Certain states impose their own interest expense limitations independent of § 163(j) and the addback statutes. For example, some states limit the deduction for total interest expense to a percentage of taxable income, impose dollar caps, or disallow deductions for debt that exceeds a specified debt-to-equity ratio. These state-specific limitations must be analyzed on a jurisdiction-by-jurisdiction basis.

Recommendation. We recommend that the deal team engage Crestline Tax Advisors LLC (Alan Fitzgerald) to prepare a jurisdiction-by-jurisdiction analysis of the deductibility of interest expense under the proposed financing structure, taking into account (i) the structural positioning of the debt (direct borrowing by Pennfield vs. intercompany pushdown), (ii) the application of IRC § 163(j) at the state level, (iii) the applicability of related-party interest addback statutes in each filing state, and (iv) any state-specific interest expense limitations. This analysis should model the after-tax cost of the acquisition financing in each filing state and identify states where the interest deduction is wholly or partially disallowed, as the disallowed interest will increase the effective tax rate and reduce free cash flow to the fund.

D. Pass-Through Entity Tax Elections

In recent years, a significant number of states have enacted elective pass-through entity taxes ("PTETs") as a workaround to the $10,000 federal limitation on the deduction for state and local taxes imposed by IRC § 164(b)(6) (the "SALT cap"). Under a PTET regime, a pass-through entity (such as a partnership, S corporation, or LLC taxed as a partnership) may elect to pay state income tax at the entity level on its members' share of income, and the members receive a corresponding credit or exclusion at the individual level. Because the entity-level tax is a deduction against the entity's income (rather than an individual itemized deduction subject to the SALT cap), the PTET effectively allows the members to claim a federal deduction for state income taxes that would otherwise be limited by the SALT cap.

The PTET may be beneficial for the limited partners of HPE Fund IV, who are individual investors or pass-through entities themselves. However, the availability of the PTET election depends on the structure of the post-closing ownership chain:

• If Pennfield continues to operate as a C corporation post-closing, the PTET election is not available at the Pennfield level, because PTETs are available only to pass-through entities.

• If Pennfield is converted from a C corporation to a disregarded entity or partnership post-closing (by, for example, electing to be treated as a QSub of an S corporation parent, or by converting to an LLC and electing partnership treatment), a PTET election may become available in states that permit such elections.

• To the extent there are pass-through entities in the ownership chain above Pennfield (e.g., HPE Fund IV itself is a Delaware limited partnership), a PTET election may be available at the fund level in states that permit the election to be made by an upper-tier pass-through entity with respect to income flowing through from lower-tier entities.

The PTET analysis requires consideration of the specific rules in each state where the election may be beneficial, including New York, California, Connecticut, New Jersey, Illinois, and others. We recommend that this analysis be undertaken as part of the post-closing structuring evaluation, in coordination with the tax advisors to HPE Fund IV and its limited partners.

VI. State Payroll and Withholding Tax Considerations

Pennfield employs approximately 8,400 individuals across 34 states. As an employer, the Company

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Oliver Mackenzie, Responsible Partner, M&A, Calderwood & Harkness LLP Jonah Whitfield, Principal, Harrowgate Capital Partners LLC Rebecca Talmadge, Partner, Head of Consumer & Retail, Harrowgate Capital Partners LLC
FROM: Sylvia Hartwell, Specialist Partner, Tax, Calderwood & Harkness LLP
DATE: March 30, 2025
RE: State & Local Tax Considerations — Acquisition of Pennfield Holdings, Inc. (Project Summit)
MATTER NO.: 1003-00004
CONFIDENTIALITY LEGEND: This memorandum constitutes privileged and confidential attorney work product prepared by Calderwood & Harkness LLP in connection with the proposed acquisition of Pennfield Holdings, Inc. by Harrowgate Private Equity Fund IV LP. The analyses, conclusions, and recommendations contained herein are protected by the attorney-client privilege and the work product doctrine. This memorandum is intended solely for the use of the individuals and entities identified above and on the distribution list appended hereto. Any dissemination, distribution, or copying of this memorandum, in whole or in part, without the prior written authorization of Calderwood & Harkness LLP is strictly prohibited. If you have received this memorandum in error, please notify the sender immediately and destroy all copies.
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I. Executive Summary
This memorandum analyzes the state and local tax ("SALT") implications of the proposed acquisition by Harrowgate Private Equity Fund IV LP ("HPE Fund IV") of Pennfield Holdings, Inc. ("Pennfield" or the "Company," Nasdaq: PNFD) in a transaction valued at approximately $980,000,000 (the "Transaction" or the "Acquisition"). The Transaction is structured as a reverse triangular merger under Section 251 of the Delaware General Corporation Law ("DGCL"), pursuant to which Pinnacle Merger Sub, Inc. ("Merger Sub"), a newly formed Delaware corporation and wholly owned subsidiary of HPE Fund IV, will merge with and into Pennfield, with Pennfield surviving the merger as a wholly owned subsidiary of HPE Fund IV (the "Surviving Corporation"). Following the consummation of the Transaction, the Company will be taken private and delisted from the Nasdaq Global Select Market.
Pennfield is a Delaware corporation headquartered at 4500 Commerce Boulevard, Suite 800, Charlotte, North Carolina 28202. The Company operates a specialty consumer retail platform comprising 187 company-owned retail store locations and 22 outlet locations across 34 states, employing approximately 8,400 individuals. For its fiscal year ended January 31, 2025 ("FY 2024"), Pennfield reported consolidated revenue of $1,620,000,000, EBITDA of $142,000,000 (representing an 8.8% EBITDA margin), and net income of $54,300,000. The Company's fiscal year ends on January 31 of each calendar year.
Based upon our review of the available due diligence materials, applicable state and local tax laws, and discussions with the Harrowgate deal team, we have identified the following key SALT issues that warrant attention in connection with the Transaction:
(i) Nexus Footprint and Ongoing State Income/Franchise Tax Obligations. Pennfield maintains physical presence nexus in at least 34 states through its retail locations, distribution centers, and employee base, and likely has economic nexus in all 50 states and the District of Columbia as a result of its e-commerce operations. The Company currently files as a standalone C corporation in each jurisdiction where it has filing obligations, and the surviving entity will inherit the full scope of these filing obligations post-closing.
(ii) State Transfer and Stock Transfer Tax Exposure on the Merger. Several states impose real property transfer taxes or controlling-interest transfer taxes that may be triggered by the change in control of Pennfield effected through the reverse triangular merger, notwithstanding that no direct conveyance of real property occurs in the transaction. This exposure requires state-by-state analysis, with particular attention to New York, Connecticut, Maryland, Pennsylvania, and Washington.
(iii) Post-Closing Entity Restructuring for State Tax Efficiency. Following the closing of the Transaction, opportunities may exist to restructure the ownership chain for state tax efficiency, including the insertion of holding companies, intellectual property licensing arrangements, intercompany management fee structures, and intercompany debt pushdown strategies. These opportunities must be evaluated against increasingly aggressive state enforcement of economic substance requirements, addback statutes, and combined reporting mandates.
(iv) State-Level Treatment of the Management Rollover. Three members of Pennfield's senior management—Catherine Langford (CEO), Derek Simmons (CFO), and Maxwell Dunn (COO)—will contribute an aggregate of $21,500,000 in rollover equity to the post-closing ownership structure. The state tax treatment of these contributions must be analyzed to confirm tax-free treatment at the state level, particularly in North Carolina, where the rollover participants are presumed to reside.
(v) Apportionment Factor Impacts. The Transaction and any post-closing restructuring could affect the apportionment factors used to allocate Pennfield's taxable income across its filing states, with potential implications for the Company's overall state effective tax rate.
(vi) Unclaimed Property and Escheatment. Pennfield is subject to unclaimed property reporting obligations in all states in which it holds unredeemed gift cards, outstanding checks, uncashed payroll, and customer refunds. Delaware, as the state of incorporation, serves as the state of last resort for escheatment purposes.
(vii) State-Level Sales and Use Tax Compliance. Pennfield's retail and e-commerce operations create sales and use tax collection and remittance obligations across its operational footprint, and any compliance gaps identified during diligence should be addressed prior to or in connection with closing.
This memorandum should be read in conjunction with the Tax Structure Memorandum (Federal) dated March 28, 2025, and the Section 338(h)(10) Election Analysis dated March 29, 2025, both of which were prepared by the undersigned in connection with the Transaction. Additionally, the analysis set forth herein has been coordinated with Crestline Tax Advisors LLC ("Crestline"), Pennfield's external tax advisor, through Alan Fitzgerald, Managing Director, at 300 South Brevard Street, Suite 1500, Charlotte, North Carolina 28202. We have reviewed Crestline's work papers and state tax return files to the extent made available through the Project Summit data room hosted on the Thackeray Solutions platform.
The sections that follow address each of the foregoing SALT considerations in detail, together with our recommendations for further analysis and pre-closing action items.
II. Current Pennfield SALT Profile
A. State Income and Franchise Tax Nexus
Pennfield Holdings, Inc. (EIN: 82-4917305) is a corporation organized under the laws of the State of Delaware, with its principal executive offices located at 4500 Commerce Boulevard, Suite 800, Charlotte, North Carolina 28202. The Company has maintained its Delaware incorporation since its original formation and has been headquartered in Charlotte, North Carolina for the entirety of its operating history.
Physical Presence Nexus. Pennfield operates a total of 209 retail locations across 34 states, comprising 187 company-owned full-line retail stores and 22 outlet locations. Each of these retail locations constitutes a fixed place of business for purposes of establishing physical presence nexus under the applicable state income and franchise tax statutes. In addition to its retail store footprint, Pennfield maintains distribution centers, corporate offices, and other facilities that independently give rise to physical presence nexus in their respective jurisdictions. The Company employs approximately 8,400 individuals across its operations, with employees located in each of the 34 states in which it maintains retail locations as well as potentially in additional states through remote work arrangements for corporate and administrative staff.
The combination of owned and leased real property, tangible personal property (including inventory, fixtures, and equipment), and employees in each of these states creates substantial and continuous nexus for state income and franchise tax purposes. Under even the most conservative nexus standards, Pennfield's physical footprint clearly satisfies the constitutional requirements of the Due Process Clause and Commerce Clause of the United States Constitution as articulated by the Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and its progeny, and as superseded in relevant part by South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).
Economic Nexus. Beyond its physical presence in 34 states, Pennfield operates a significant e-commerce platform through which it sells merchandise to customers nationwide. Following the Supreme Court's decision in Wayfair, virtually all states with a sales tax—and, increasingly, states with an income tax—have enacted economic nexus provisions that impose filing obligations on entities exceeding specified thresholds of sales, transactions, or other economic activity within the state, irrespective of physical presence. Given Pennfield's consolidated revenue of $1,620,000,000 for FY 2024 and its nationwide e-commerce customer base, it is reasonable to conclude that the Company exceeds the applicable economic nexus thresholds in all 50 states and the District of Columbia. Accordingly, Pennfield likely has state income tax filing obligations in states where it does not maintain physical retail locations, to the extent those states impose a corporate income or gross receipts tax.
Current Filing Status. Based upon our review of the available data room materials, Pennfield currently files as a standalone C corporation in each state where it has an income or franchise tax filing obligation. The Company is not a member of any existing consolidated or combined filing group at the state level. This is consistent with its status as a publicly traded standalone entity with no corporate parent. Following the Transaction, Pennfield will become an indirect wholly owned subsidiary of HPE Fund IV, which may give rise to combined or unitary filing obligations with other entities in the Harrowgate organizational structure, as discussed in Section V.B below.
Delaware Franchise Tax. As a Delaware corporation, Pennfield is subject to the annual Delaware franchise tax, which is computed under either the authorized shares method or the assumed par value capital method, whichever results in a lower tax liability. Pennfield currently has 58,200,000 shares of common stock issued and outstanding on a basic basis, and 61,450,000 shares outstanding on a fully diluted basis (including outstanding stock options and restricted stock units). Following the Transaction, the surviving corporation's authorized shares and capital structure may be adjusted, which could affect the annual Delaware franchise tax computation. We recommend that the post-closing capital structure be reviewed in consultation with Delaware local counsel, Marsden & Holt LLP (Elizabeth Parrish, Partner), to optimize the franchise tax calculation.
B. Existing Filing Positions and Audit History
Data Room Review. In connection with the due diligence process for Project Summit, we have reviewed state income and franchise tax returns, correspondence, and audit files made available through the Thackeray Solutions data room platform. The data room contained Pennfield's state income tax returns for the three most recent fiscal years (FY 2022, FY 2023, and FY 2024), along with selected supporting work papers prepared by Crestline Tax Advisors LLC.
Open Audit Years and Pending Matters. Based on the statute of limitations applicable in each filing jurisdiction, the following general framework applies to Pennfield's open audit years: most states have a three- or four-year statute of limitations for assessment of income tax deficiencies, measured from the later of the original return due date or the date of filing. Given Pennfield's January 31 fiscal year-end, the Company's FY 2021 and subsequent fiscal years are generally open for assessment in most jurisdictions. In states that provide for an extended statute of limitations (e.g., six years for substantial understatements of income), FY 2019 and subsequent years may also remain open.
We have identified from the data room materials several open state tax audit examinations and other pending matters that require further investigation. These matters should be the subject of detailed inquiry directed to Pennfield's General Counsel, Patricia Okafor, and to Crestline, as part of the ongoing due diligence process. The due diligence team members—Ryan Kowalski and Megan Chu of Calderwood & Harkness LLP—have been advised to include specific requests for all state tax audit files, correspondence, assessments, closing agreements, and voluntary disclosure agreements in the supplemental diligence request list.
Any outstanding state tax assessments, pending audit adjustments, or accrued but unpaid state tax liabilities should be reflected in the Target's closing balance sheet and should be addressed in the indemnification and disclosure schedule provisions of the Merger Agreement. The interaction between these pre-closing state tax liabilities and the representations and warranties insurance policy is discussed in Section IX below.
Audited Financial Statements. Pennfield's independent auditor, Pemberton & Associates LLP, under the direction of Kevin Tarrant Corporation, Lead Audit Partner, has audited the Company's consolidated financial statements for FY 2024. The audited financial statements reflect state income tax provisions computed in accordance with ASC 740 (Income Taxes), including the measurement of deferred tax assets and liabilities and the evaluation of uncertain tax positions. We have reviewed the state income tax provision work papers to the extent made available and note that the Company has recorded a reserve for uncertain tax positions related to certain state filing positions. The specific nature and amount of these reserves require further confirmation from Crestline and Pemberton & Associates.
C. State Apportionment Methodology
Pennfield's consolidated revenue of $1,620,000,000 for FY 2024 is apportioned across its filing states using the apportionment formulas prescribed by each state's tax code. The trend across the states over the past two decades has been a movement toward single-sales-factor apportionment, and the majority of states in which Pennfield files have adopted a single-sales-factor formula or a formula that heavily weights the sales factor. In states that continue to employ a traditional three-factor formula (sales, property, and payroll, equally weighted or with a double-weighted sales factor), Pennfield's extensive retail location footprint, distribution center network, and employee base will result in significant property and payroll factor numerators in those states, potentially increasing the Company's apportionable income in those jurisdictions relative to a single-sales-factor state.
Key States by Revenue Concentration. North Carolina, as the headquarters state and home to major distribution operations, is expected to represent a substantial share of Pennfield's apportioned income. Other states with major retail presence—which we anticipate include states such as Texas, Florida, California, New York, New Jersey, Pennsylvania, Ohio, Illinois, Georgia, and Virginia, based on the distribution of the Company's 209 retail and outlet locations—will also claim significant apportionment shares. The precise revenue concentration by state requires further analysis based on the state-by-state revenue data in the Project Summit data room. We have requested store-level revenue data from Pennfield's finance team to complete this analysis.
Impact of Post-Closing Restructuring on Apportionment. Any post-closing restructuring—including the insertion of holding companies, intellectual property entities, or management companies—will affect the composition and magnitude of the apportionment factors in each filing state. For example, if intercompany royalty payments are made by the operating entity to an IP holding company, the operating entity's sales factor numerator in each state may remain unchanged, but its net income subject to apportionment will be reduced by the royalty deduction (to the extent deductible under applicable state law). Conversely, the IP holding company may have nexus and filing obligations in states where Pennfield operates if the states take the position that the IP holding company is part of a unitary group or has economic nexus through the receipt of royalty income sourced to those states.
D. Sales and Use Tax
Pennfield collects and remits state and local sales tax on retail transactions conducted at its 209 physical store locations in accordance with the sales tax laws of each applicable jurisdiction. For e-commerce sales, the Company applies destination-based sourcing rules consistent with the requirements of each state's economic nexus provisions, collecting tax based on the delivery address of the customer.
Given the Company's nationwide e-commerce operations and FY 2024 revenue of $1,620,000,000, Pennfield likely exceeds the economic nexus thresholds for sales tax collection in all 45 states (and the District of Columbia) that impose a general sales tax. We understand from the data room materials that Pennfield uses an automated tax calculation engine (tax technology platform) integrated with its point-of-sale and e-commerce systems to compute, collect, and remit sales tax.
During due diligence, we have identified the need for further investigation into (i) any open sales tax audit examinations, (ii) any voluntary disclosure agreements that the Company has entered into with state taxing authorities to remediate prior periods of non-collection or non-remittance, and (iii) the Company's compliance with product-level taxability determinations (including, for example, the taxability of clothing and accessories in states with clothing exemptions or tax holidays). The due diligence team has included these items in the supplemental request list.
Any pre-closing sales tax liabilities, including potential exposure from audits or compliance gaps, should be quantified and addressed in the disclosure schedules to the Merger Agreement and factored into the purchase price or indemnification provisions, as appropriate.
E. Unclaimed Property / Escheatment
Pennfield is subject to unclaimed property (escheatment) reporting obligations in all 50 states and the District of Columbia. As a national retailer, the Company holds range property types that are commonly subject to escheatment, including:
• Unredeemed gift cards and store credits (subject to varying treatment by state; several states exempt gift cards from escheatment, while others treat unredeemed balances as reportable unclaimed property after a specified dormancy period);
• Outstanding checks, including accounts payable checks, vendor refunds, and customer refund checks that remain uncashed after the applicable dormancy period;
• Uncashed payroll checks and unclaimed wages;
• Customer refunds, credits, and overpayments;
• Unclaimed dividends (for the period during which Pennfield was publicly traded and paying dividends, if applicable); and
• Other intangible property held for the benefit of third parties.
Under the priority rules established by the Supreme Court in Texas v. New Jersey, 379 U.S. 674 (1965), and Delaware v. New York, 507 U.S. 490 (1993), unclaimed intangible property is escheatable, first, to the state of the owner's last known address as reflected in the holder's records, and, second (if the holder's records do not reflect the owner's last known address or if the owner's last known address is in a state that does not provide for escheatment of the property at issue), to the state of the holder's incorporation. Because Pennfield is incorporated in Delaware, the State of Delaware serves as the state of last resort for escheatment of any intangible property for which the Company's records do not reflect the owner's last known address. Delaware has been notably aggressive in its enforcement of unclaimed property laws, including through the use of third-party audit firms operating under contingency fee arrangements.
We recommend that Pennfield's unclaimed property compliance be reviewed as part of the diligence process, including the adequacy of the Company's reporting procedures, the completeness of its historical escheatment filings, and the existence of any pending unclaimed property audits or voluntary disclosure agreements. Any material unclaimed property exposure should be reflected in the Company's financial statements and addressed in the Merger Agreement.
III. State Transfer Tax and Documentary Stamp Tax Analysis
A. Overview of State Transfer Tax Regimes
A critical threshold question in any M&A transaction is whether the transaction structure triggers state or local transfer taxes, real estate transfer taxes, or documentary stamp taxes. These taxes, which are generally imposed on the conveyance of real property or interests therein, can represent a significant and often overlooked transaction cost. The applicable tax rates, exemptions, and triggering events vary widely from state to state, and the analysis requires a careful review of the specific transaction mechanics against the statutory provisions in each jurisdiction where the target entity holds interests in real property.
In the Transaction, Pinnacle Merger Sub, Inc. (EIN: 93-4081562) will merge with and into Pennfield under DGCL § 251, with Pennfield surviving as the wholly owned subsidiary of HPE Fund IV. By operation of the reverse triangular merger, the stockholders of Pennfield will surrender their shares of Pennfield common stock in exchange for the per-share merger consideration of $15.95 in cash (subject to the management rollover described herein), and the shares of Merger Sub stock held by HPE Fund IV will be converted into shares of the surviving corporation. Critically, in this structure:
• No direct transfer of real property occurs. Pennfield continues to hold all of its assets, including any owned real property, in the same legal entity before and after the merger.
• No deed or other instrument of conveyance is executed or recorded with respect to any real property held by Pennfield.
• The legal title to all real property held by Pennfield remains in the name of Pennfield Holdings, Inc. (the surviving corporation) without interruption.
In most jurisdictions, the absence of a direct conveyance of real property means that traditional real property transfer taxes are not triggered by the Transaction. However, a growing number of states have enacted "controlling interest" transfer tax provisions that treat a transfer of a controlling interest (typically defined as 50% or more of the ownership interests) in an entity that holds real property as a taxable event, irrespective of whether the underlying real property is directly conveyed. These controlling-interest provisions are specifically designed to capture changes of control effected through entity-level transactions such as mergers, stock purchases, and membership interest transfers, and they will be implicated in the Transaction because HPE Fund IV will acquire 100% of the equity of Pennfield by operation of the merger.
The analysis below addresses the transfer tax implications in key jurisdictions on a state-by-state basis.
B. Key State-by-State Transfer Tax Analysis
Delaware. The State of Delaware does not impose a general transfer tax on mergers or other corporate reorganizations. Delaware's real property transfer tax (codified at 30 Del. C. § 5401 et seq.) is imposed on the transfer of real property by deed or other instrument of writing, and the reverse triangular merger does not involve the execution or recording of a deed with respect to any Delaware real property. Accordingly, we do not anticipate any Delaware transfer tax or documentary stamp tax liability arising from the Transaction. To the extent Pennfield holds any real property in Delaware (which we have not identified from the data room materials), the absence of a direct conveyance should shield the Transaction from Delaware real property transfer tax.
North Carolina. North Carolina imposes an excise tax on the conveyance of real property at the rate of $1.00 per $500 of consideration (or fractional part thereof), commonly referred to as the "revenue stamps" or "excise stamps" tax, codified at N.C. Gen. Stat. § 105-228.30. This tax is imposed on instruments that convey an interest in real property, and the taxable event is the recording of the instrument with the county register of deeds. In a reverse triangular merger where Pennfield survives and retains legal title to its real property, no instrument of conveyance is typically executed or recorded, and therefore the excise tax should not be triggered.
However, careful analysis is required with respect to the Company's Charlotte headquarters. The headquarters at 4500 Commerce Boulevard, Suite 800, Charlotte, North Carolina 28202, is understood to be leased premises rather than owned real property. This understanding is based on preliminary information from the data room, but should be confirmed through the real estate diligence workstream. If Pennfield owns any real property in North Carolina—whether the headquarters, distribution center facilities, or other properties—the North Carolina excise tax analysis must be revisited. North Carolina does not currently have a controlling-interest transfer tax provision, and therefore a change in ownership of the entity holding the real property (without a direct conveyance) should not independently trigger the excise tax. Nonetheless, we recommend confirmation from North Carolina local counsel on this point, given that the North Carolina Department of Revenue has periodically considered the application of the excise tax to entity-level transactions.
New York. New York presents the most significant transfer tax exposure in connection with the Transaction due to the breadth and complexity of its real property transfer tax regime. The analysis involves two distinct levies:
New York State Real Property Transfer Tax. The New York State real property transfer tax ("RPTT"), codified at N.Y. Tax Law § 1402, is imposed on conveyances of real property or interests therein where the consideration exceeds $500. The tax rate is $2.00 per $500 of consideration (0.4%) for residential property and $2.00 per $500 of consideration for commercial property. Critically for the Transaction, New York Tax Law § 1401(e) defines "conveyance" to include the transfer or acquisition of a "controlling interest" in any entity that holds an interest in real property. A "controlling interest" is defined as 50% or more of the total combined voting power of all classes of stock of a corporation, or 50% or more of the capital, profits, or beneficial interest in a partnership, association, or other unincorporated entity. Because the Transaction will result in HPE Fund IV acquiring 100% of the stock of Pennfield (the surviving corporation), the controlling-interest provisions will be triggered in New York if Pennfield holds any interest in New York real property—including as a lessee under a lease with a remaining term (including renewal options) of 49 years or more, which is treated as an interest in real property under N.Y. Tax Law § 1401(e)(1)(iii).
New York City Real Property Transfer Tax. In addition to the state RPTT, New York City imposes its own real property transfer tax (NYC Admin. Code §§ 11-2101 et seq.) on conveyances of real property located within the five boroughs. The NYC RPTT rates for commercial property are 1.425% for consideration exceeding $500,000 and 2.625% for consideration of $500,000 or less. The NYC RPTT also contains controlling-interest provisions that parallel the state provisions. Furthermore, the so-called "mansion tax" under N.Y. Tax Law § 1402-a imposes an additional 1% tax on residential real property conveyances where the consideration exceeds $1,000,000, though this is unlikely to apply in the context of a commercial retail operation.
Quantification. The magnitude of Pennfield's New York transfer tax exposure depends entirely on whether the Company holds any interest in real property located in New York State or New York City. If Pennfield operates retail locations in New York on leased premises with lease terms of less than 49 years (including renewal options), those leasehold interests may not constitute interests in "real property" for purposes of the controlling-interest transfer tax. However, if Pennfield holds any fee ownership interest in New York real property, or holds long-term leases that meet the 49-year threshold, the transfer tax exposure could be material, calculated based on the proportionate share of the consideration allocable to the New York real property. We are currently reviewing the Real Estate & Lease Portfolio Summary from the data room to identify all New York properties and their ownership and lease terms.
Other States with Controlling-Interest Transfer Tax Provisions. In addition to New York, several other states have enacted controlling-interest transfer tax or change-of-ownership transfer tax provisions that may be implicated by the Transaction. The following states require analysis:
• Connecticut: Connecticut imposes a real estate conveyance tax (Conn. Gen. Stat. § 12-494 et seq.) that includes a controlling-interest transfer tax provision. A transfer of a controlling interest (50% or more) in an entity that holds Connecticut real property is treated as a conveyance subject to the tax. The applicable rate varies by municipality but generally ranges from 0.75% to 1.25% of the consideration allocable to the Connecticut real property.
• Maryland: Maryland imposes a transfer tax and recordation tax on transfers of real property, including transfers of controlling interests in entities holding Maryland real property. The transfer tax rate is 0.5% of consideration (state level), with additional county-level transfer taxes that vary by county. The recordation tax is imposed at the rate of $5.00 per $500 ($7.00 per $500 in certain counties). The controlling-interest provisions apply to transfers of 80% or more of the interests in an entity holding Maryland real property.
• Pennsylvania: Pennsylvania imposes a realty transfer tax at a combined state and local rate that can exceed 4% in Philadelphia. Pennsylvania's controlling-interest provisions (72 P.S. § 8102-C.3) treat a transfer of 90% or more of the interests in an entity holding Pennsylvania real property as a transfer subject to the realty transfer tax. The 90% threshold is unique among states and is more favorable to acquirers than the 50% threshold used in other jurisdictions; however, because HPE Fund IV will acquire 100% of Pennfield's stock, the 90% threshold will be exceeded.
• Washington: Washington State imposes a real estate excise tax (REET) at graduated rates on transfers of real property, including transfers of controlling interests in entities holding Washington real property. The controlling-interest provisions are codified at RCW § 82.45.010 and define a controlling interest as 50% or more. The REET rates range from 1.1% to 3.0% depending on the value of the real property.
• Additional States: Other states that may impose controlling-interest transfer taxes or similar levies include, but are not limited to, California (limited to certain county-level documentary transfer taxes in jurisdictions that have adopted charter city provisions), Florida, Michigan, and Vermont. Each of these states must be analyzed based on Pennfield's specific real property holdings within the state.
Aggregate Transfer Tax Exposure. At this stage, we are unable to quantify the aggregate transfer tax exposure with precision because the analysis depends on (i) the identification of all states in which Pennfield holds owned real property (as opposed to leased premises), (ii) the determination of the fair market value of such owned real property, (iii) the allocation of the aggregate merger consideration among the real property interests in each state, and (iv) the application of the specific controlling-interest provisions in each state (including applicable thresholds, rates, and exemptions). We anticipate that the aggregate transfer tax exposure will be a component of the estimated transaction costs, which are currently budgeted at approximately $60,000,000. The completion of the state-by-state analysis is identified as a priority action item in Section X below.
C. Mitigation Strategies
Several potential mitigation strategies are available to reduce or eliminate the Transaction's state transfer tax exposure:
Reliance on Reverse Triangular Merger Structure. The primary structural argument is that the reverse triangular merger—in which Pennfield survives as the continuing legal entity and retains title to all of its assets, including real property—does not constitute a "conveyance" or "transfer" of real property under the traditional real property transfer tax statutes in most jurisdictions. This argument is strongest in states that do not have controlling-interest transfer tax provisions, where the absence of a recorded deed or other instrument of conveyance should be dispositive.
Controlling-Interest Provisions. In states that have enacted controlling-interest transfer tax provisions, the reverse triangular merger structure will not provide insulation from the tax, because the acquisition of 100% of Pennfield's stock by HPE Fund IV clearly constitutes a transfer of a controlling interest. In these states, the focus shifts to identifying the scope and magnitude of the exposure and evaluating whether any exemptions or exclusions are available. For example, certain states exempt transfers between related entities or transfers pursuant to corporate reorganizations from controlling-interest transfer taxes, though these exemptions are narrowly construed and may not apply to a third-party acquisition such as the Transaction.
Pre-Closing Restructuring. In theory, transfer tax exposure in controlling-interest transfer tax states could be reduced by transferring owned real property from Pennfield to a separate entity prior to the merger, so that the entity whose controlling interest is being transferred (Pennfield) no longer holds the real property at the time of the transfer. However, this strategy carries significant risks: (i) the transfer of real property from Pennfield to a separate entity would itself be a taxable conveyance in most jurisdictions, merely accelerating the transfer tax liability; (ii) many states have anti-avoidance provisions that look through pre-closing restructurings effected in anticipation of a change of control; and (iii) the complexity and timeline required to effectuate a pre-closing real property restructuring may be incompatible with the Transaction timeline and closing conditions. Accordingly, we do not recommend pursuing a pre-closing real property restructuring absent a compelling economic justification based on the magnitude of the transfer tax exposure identified in the state-by-state analysis.
Allocation of Transfer Tax Liability. The Merger Agreement should address the allocation of transfer tax liability between the buyer and the seller. It is customary in take-private transactions for the buyer to bear the cost of transfer taxes imposed on the Transaction, but this is a negotiated point. We recommend that the deal team confirm the allocation of transfer taxes in the Merger Agreement and ensure that the estimated transfer tax exposure is included in the buyer's transaction cost budget.
IV. State Income Tax Consequences of the Merger
A. Treatment of Merger Consideration Paid to Pennfield Stockholders
In the Transaction, the public stockholders of Pennfield will receive cash merger consideration of $15.95 per share in exchange for their shares of Pennfield common stock. The receipt of this cash consideration will be a taxable event for the stockholders, who will recognize gain or loss equal to the difference between the cash consideration received and their adjusted tax basis in their Pennfield shares. The state income tax consequences of this gain or loss flow to the individual stockholders based on their respective states of residence and are not a direct tax liability of Harrowgate, HPE Fund IV, the Merger Sub, or the surviving Pennfield entity.
However, the Transaction may give rise to state withholding obligations that must be administered by the paying agent. Certain states—most notably California—require withholding on payments to non-resident stockholders in connection with the acquisition of stock or assets of a business entity operating within the state. Under California Revenue & Taxation Code § 18662, for example, a buyer or withholding agent may be required to withhold a specified percentage of the total sale price allocable to California from payments to non-California resident sellers. Similar provisions exist in other states, though they are less commonly enforced in the context of publicly traded company mergers where the identity and residency of individual stockholders are not readily ascertainable by the paying agent.
We recommend that the deal team coordinate with Marlowe Asset Management Stock Transfer, Inc. (Daniel Roth, Vice President, Corporate Actions), which will serve as the paying agent for the Transaction, to evaluate whether any state withholding obligations apply and, if so, to implement appropriate withholding procedures. Given the complexity of administering state withholding across a diffuse public stockholder base, it may be necessary to obtain specific guidance from the relevant state taxing authorities or to apply for withholding waivers where available.
B. Treatment of Management Rollover
Three members of Pennfield's senior management team will participate in a management rollover in connection with the Transaction, pursuant to which they will contribute a portion of their equity consideration into the post-closing ownership structure in exchange for equity interests in the surviving entity or its parent:
The aggregate management rollover of $21,500,000 represents approximately 2.2% of the total equity value of $980,000,000. The rollover is expected to be structured at the federal level as a tax-free contribution of property (Pennfield shares or the right to receive merger consideration) in exchange for partnership or LLC interests in a partnership or LLC entity in the post-closing ownership chain, qualifying for non-recognition treatment under IRC § 721 (for contributions to partnerships) or IRC § 351 (for contributions to corporations), as applicable. The specific structure of the rollover vehicle and the applicable federal non-recognition provision are addressed in the Tax Structure Memorandum (Federal) dated March 28, 2025.
State Tax Conformity. For state income tax purposes, the critical question is whether the states in which the rollover participants are subject to income tax conform to the applicable federal non-recognition provision. Most states that impose an income tax use federal taxable income (or federal adjusted gross income, for individuals) as the starting point for the computation of state taxable income and generally conform to the federal treatment of contributions under IRC § 721 or § 351. Accordingly, to the extent the rollover qualifies for non-recognition treatment at the federal level, the same treatment should be respected at the state level in most jurisdictions.
North Carolina. North Carolina, as the state of Pennfield's headquarters and the presumed state of residence of Langford, Simmons, and Dunn, is the most significant jurisdiction for purposes of this analysis. North Carolina generally conforms to the Internal Revenue Code as of a specified date (rolling conformity with certain decoupled provisions) for purposes of computing state taxable income. Specifically, North Carolina conforms to the federal treatment of non-recognition transactions under IRC §§ 351 and 721, and we do not anticipate that the management rollover will trigger North Carolina income tax for the participating executives, provided the federal non-recognition requirements are satisfied. However, the precise conformity date and any North Carolina-specific modifications should be confirmed at the time of the rollover.
Non-Conforming States. If any rollover participant is a resident of, or subject to tax in, a state that does not conform to the applicable federal non-recognition provision—or that has enacted modifications that limit the scope of non-recognition treatment for certain types of contributions—the participant could face state-level gain recognition on the rollover transaction. We are not currently aware of any such non-conformity issues affecting Langford, Simmons, or Dunn, but this should be confirmed once the rollover structure and the participants' states of residence are finalized. Additionally, if any rollover participant relocates to a different state between now and the closing date, the analysis will need to be updated.
C. Impact on Pennfield's State Tax Attributes
State Net Operating Losses. Pennfield may have state net operating loss ("NOL") carryforwards in one or more filing states. The Transaction will result in an "ownership change" of Pennfield for purposes of IRC § 382, as HPE Fund IV will acquire 100% of Pennfield's stock. Most states conform to the federal IRC § 382 limitation on the use of pre-change NOLs following an ownership change, which limits the annual use of pre-change NOLs to the product of the value of the loss corporation immediately before the ownership change multiplied by the applicable long-term tax-exempt rate. However, the state-level application of § 382 can vary:
• Some states apply § 382 on a consolidated or combined basis, which may produce a different limitation amount than the federal computation.
• Some states impose their own, more restrictive limitations on the use of NOL carryforwards independent of § 382 (e.g., percentage-of-income limitations, dollar caps, or suspension periods).
• A few states do not permit NOL carryforwards at all, rendering the § 382 analysis moot in those jurisdictions.
The quantification of Pennfield's state NOL carryforwards and the application of § 382 limitations at the state level is a priority item for the due diligence team. Ryan Kowalski and Megan Chu have been instructed to request from Pennfield a state-by-state schedule of NOL carryforwards, including carryforward periods and any existing § 382 limitations from prior ownership changes.
State Tax Credits. Pennfield may hold state-level tax credits, including research and development credits, investment tax credits, and job creation credits, in various states. The transferability and survival of these credits post-merger must be assessed on a state-by-state basis. In some states, tax credits are personal to the taxpayer and cannot be transferred, while in others they may be assigned or may survive a change of control if the entity continues to exist (as it does in a reverse triangular merger, where Pennfield is the surviving corporation). We recommend a comprehensive inventory of all state tax credits and an analysis of their post-Transaction status.
Delaware Franchise Tax. The surviving entity will continue to be a Delaware corporation following the Transaction, and accordingly, the annual Delaware franchise tax obligation will continue without interruption. As noted above, the post-closing capital structure should be reviewed to optimize the franchise tax computation under the authorized shares or assumed par value capital method.
V. Post-Closing Entity Structuring for State Tax Efficiency
A. Holding Company Structure
Following the closing of the Transaction, the ownership chain for Pennfield will be as follows: Pennfield Holdings, Inc. (the surviving Delaware corporation) will be a wholly owned subsidiary of HPE Fund IV, a Delaware limited partnership. HPE Fund IV's general partner is Harrowgate Capital Partners IV GP LLC, a Delaware limited liability company, and the investment manager is Harrowgate Capital Partners LLC, a Delaware limited liability company headquartered at 1200 Market Street, Suite 3100, Wilmington, Delaware 19801.
We recommend evaluating the insertion of one or more intermediate entities between HPE Fund IV and the surviving Pennfield entity to facilitate state tax-efficient management of intercompany transactions and to provide structural flexibility for potential future dispositions or restructurings. Specifically, the following structures warrant consideration:
Delaware Holding Company. A Delaware holding company could be inserted between HPE Fund IV and Pennfield to serve as a holding and financing vehicle. This entity could hold the equity interests in Pennfield and could serve as the borrower or guarantor under the credit facilities, facilitating the pushdown of acquisition debt to the operating level. Delaware does not impose a corporate income tax on entities whose activities within the state are limited to maintaining their legal existence, holding equity interests in subsidiaries, and receiving dividends or other investment income. Accordingly, a Delaware holding company may be able to receive dividends, management fees, or interest income from Pennfield without incurring Delaware corporate income tax (though the entity would remain subject to the Delaware franchise tax).
IP Holding Company. The creation of a separate entity to hold and license Pennfield's trademarks, trade names, trade dress, and other intellectual property back to the operating entity has been a common state tax planning strategy employed by national retailers. Under this structure, the IP holding company receives royalty payments from the operating entity in exchange for the license of the intellectual property, and the royalty payments reduce the operating entity's taxable income in its filing states. The IP holding company, if domiciled in a jurisdiction that does not impose an income tax on royalty income (or imposes a favorable tax), may achieve a lower effective tax rate on the royalty income than the operating entity would have achieved on the equivalent operating income.
However, the effectiveness of this strategy has been substantially eroded over the past two decades as states have enacted "addback" statutes that require taxpayers to add back to their state taxable income any royalty payments, management fees, or interest expenses paid to related parties, unless the taxpayer can demonstrate that the payments have economic substance and are made at arm's length. As of March 2025, the majority of states in which Pennfield files have adopted some form of addback statute or related-party expense disallowance rule. Additionally, in states with mandatory combined or unitary reporting (discussed below), the intercompany royalty payments would be eliminated in the combined return, negating the intended tax benefit.
Accordingly, while we do not foreclose the IP holding company strategy, we caution that its effectiveness is highly dependent on the specific state filing positions and the Company's ability to satisfy the economic substance and arm's-length pricing requirements in each state. A detailed state-by-state analysis of the addback statutes and their exceptions is a prerequisite to any implementation of this structure.
B. Combined / Unitary Filing Considerations
The addition of Pennfield to the Harrowgate portfolio raises the question of whether Pennfield will be required to file on a combined or unitary basis with other Harrowgate portfolio companies in states that mandate combined or unitary reporting. The determination of whether entities are engaged in a "unitary business" is a facts-and-circumstances inquiry that generally requires the presence of (i) common ownership (typically more than 50%), (ii) functional integration, centralized management, or economies of scale among the commonly owned entities, and (iii) flows of value among the entities.
Common Ownership. Following the Transaction, Pennfield and all other portfolio companies of HPE Fund IV will share common ownership through the fund. This satisfies the common ownership prong of the unitary business test. However, it is important to note that many states apply the unitary business test at the level of the specific entities in question, and common ownership through a private equity fund structure does not automatically render all portfolio companies unitary with one another. The determination depends on whether the portfolio companies share functional integration, centralized management, or economies of scale beyond the passive investment relationship maintained by the fund.
Functional Integration. Pennfield's retail operations are in the consumer and retail sector. If Harrowgate Capital Partners LLC holds other portfolio companies in the same or related sectors—and if those portfolio companies share management personnel, operational resources, supply chain infrastructure, back-office functions, or customer relationships with Pennfield—a state taxing authority could assert that the entities are engaged in a unitary business. The Harrowgate deal team should provide a list of existing HPE Fund IV portfolio companies and their operations so that we can assess the potential for unitary business determinations in each mandatory combined reporting state.
Key Combined Reporting States. The following states, among others, have adopted mandatory combined reporting regimes that could implicate Pennfield's filing position:
• California: Mandatory combined reporting for unitary groups (Cal. Rev. & Tax. Code § 25101 et seq.). California's water's-edge combined report includes all domestic members of the unitary group. California applies a single-sales-factor apportionment formula.
• Illinois: Mandatory combined reporting effective for tax years ending on or after December 31, 2022 (35 ILCS 5/1501(a)(27), as amended). Illinois requires the inclusion of all unitary members in a combined return.
• New York: New York requires combined reporting for corporations that are part of a combined group under N.Y. Tax Law § 210-C. The combined group includes all corporations that are commonly owned (more than 50%) and that meet the capital stock condition, the income/expense condition, or the group election condition.
• Texas: The Texas franchise (margin) tax requires combined reporting for all entities that are part of a combined group with more than 50% common ownership (Tex. Tax Code § 171.1014). The combined group must file a single combined report and apportion its taxable margin using a single-sales-factor formula.
• Other States: Additional states with mandatory combined reporting requirements include, but are not limited to, Connecticut, Massachusetts, Michigan, Minnesota, Montana, Nebraska, Oregon, Vermont, West Virginia, and Wisconsin. Each state's combined reporting rules must be analyzed individually to determine their applicability to the Harrowgate/Pennfield ownership structure.
The impact of combined reporting on Pennfield's state tax liability can be either positive or negative, depending on the relative profitability and apportionment factors of the entities included in the combined return. If other Harrowgate portfolio companies have losses or unfavorable apportionment factors in a given state, their inclusion in the combined return could reduce the group's aggregate state tax liability. Conversely, if the other portfolio companies have significant sales or other apportionment factors in a state where Pennfield's standalone liability was relatively low, the combined return could increase the aggregate tax burden.
C. Intercompany Debt and Interest Deductions
The Transaction will be financed in part through third-party debt, consisting of a $490,000,000 Term Loan B facility (bearing interest at SOFR plus 400 basis points, with a seven-year maturity) and a $150,000,000 Revolving Credit Facility (bearing interest at SOFR plus 350 basis points, with a five-year maturity), both provided by a syndicate led by Falconer National Bank, N.A. The combined debt facilities total $640,000,000 in committed capacity.
To the extent the acquisition debt is structurally positioned at or pushed down to the Pennfield operating entity level (or to an entity that is included in Pennfield's combined or unitary filing group), the interest expense on the debt will reduce Pennfield's state taxable income in states where the Company files income tax returns. Based on the current Term Loan B balance of $490,000,000 and an assumed all-in interest rate of approximately 4.0% (SOFR) plus 400 basis points (4.0%), or approximately 8.0% on a blended basis, the annual interest expense on the Term Loan B alone is estimated at approximately $39,200,000. If SOFR is assumed at its current prevailing rate of approximately 4.33%, the annual interest expense would be approximately $40,800,000. However, based on the reference in the deal materials to an estimated interest expense of $19,600,000, we note that the precise SOFR rate and the interest calculation methodology should be confirmed with the financing team; the $19,600,000 figure may reflect a lower assumed SOFR rate or a partial-year calculation. For purposes of this memorandum, we use the $19,600,000 annual interest expense estimate for the Term Loan B as provided by the deal team.
At the current leverage level of approximately 3.2x Net Debt / LTM EBITDA, the state deductibility of interest expense is a material planning consideration that directly affects the after-tax cost of the acquisition financing.
State-Level Interest Expense Limitations. The deductibility of interest expense at the state level is subject to multiple overlapping limitations:
IRC § 163(j) Conformity. At the federal level, IRC § 163(j) limits the deduction for business interest expense to the sum of business interest income plus 30% of adjusted taxable income (ATI). Most states conform to the federal § 163(j) limitation as part of their general conformity to the Internal Revenue Code, though some states have decoupled from the provision or apply it with modifications. The § 163(j) limitation applies to all business interest expense, including interest on third-party debt, and is not limited to related-party interest.
Related-Party Interest Addback Statutes. Separate from § 163(j), many states have enacted statutes that require taxpayers to add back to their state taxable income any interest expense paid to related parties (i.e., entities under common ownership or control). These addback statutes are designed to prevent the erosion of the state tax base through intercompany financing arrangements. To the extent the acquisition debt is pushed down to Pennfield through intercompany lending (e.g., a parent entity borrows from Falconer National Bank and on-lends to Pennfield at a comparable or higher rate), the interest payments from Pennfield to its parent would be treated as related-party interest and could be subject to addback in states with such provisions.
Most addback statutes provide exceptions where the taxpayer can demonstrate that (i) the related-party transaction has a valid business purpose and economic substance, (ii) the interest is paid at arm's length, and (iii) the related-party recipient is subject to tax on the interest income in another jurisdiction. The availability and scope of these exceptions vary by state.
State-Specific Limitations. Certain states impose their own interest expense limitations independent of § 163(j) and the addback statutes. For example, some states limit the deduction for total interest expense to a percentage of taxable income, impose dollar caps, or disallow deductions for debt that exceeds a specified debt-to-equity ratio. These state-specific limitations must be analyzed on a jurisdiction-by-jurisdiction basis.
Recommendation. We recommend that the deal team engage Crestline Tax Advisors LLC (Alan Fitzgerald) to prepare a jurisdiction-by-jurisdiction analysis of the deductibility of interest expense under the proposed financing structure, taking into account (i) the structural positioning of the debt (direct borrowing by Pennfield vs. intercompany pushdown), (ii) the application of IRC § 163(j) at the state level, (iii) the applicability of related-party interest addback statutes in each filing state, and (iv) any state-specific interest expense limitations. This analysis should model the after-tax cost of the acquisition financing in each filing state and identify states where the interest deduction is wholly or partially disallowed, as the disallowed interest will increase the effective tax rate and reduce free cash flow to the fund.
D. Pass-Through Entity Tax Elections
In recent years, a significant number of states have enacted elective pass-through entity taxes ("PTETs") as a workaround to the $10,000 federal limitation on the deduction for state and local taxes imposed by IRC § 164(b)(6) (the "SALT cap"). Under a PTET regime, a pass-through entity (such as a partnership, S corporation, or LLC taxed as a partnership) may elect to pay state income tax at the entity level on its members' share of income, and the members receive a corresponding credit or exclusion at the individual level. Because the entity-level tax is a deduction against the entity's income (rather than an individual itemized deduction subject to the SALT cap), the PTET effectively allows the members to claim a federal deduction for state income taxes that would otherwise be limited by the SALT cap.
The PTET may be beneficial for the limited partners of HPE Fund IV, who are individual investors or pass-through entities themselves. However, the availability of the PTET election depends on the structure of the post-closing ownership chain:
• If Pennfield continues to operate as a C corporation post-closing, the PTET election is not available at the Pennfield level, because PTETs are available only to pass-through entities.
• If Pennfield is converted from a C corporation to a disregarded entity or partnership post-closing (by, for example, electing to be treated as a QSub of an S corporation parent, or by converting to an LLC and electing partnership treatment), a PTET election may become available in states that permit such elections.
• To the extent there are pass-through entities in the ownership chain above Pennfield (e.g., HPE Fund IV itself is a Delaware limited partnership), a PTET election may be available at the fund level in states that permit the election to be made by an upper-tier pass-through entity with respect to income flowing through from lower-tier entities.
The PTET analysis requires consideration of the specific rules in each state where the election may be beneficial, including New York, California, Connecticut, New Jersey, Illinois, and others. We recommend that this analysis be undertaken as part of the post-closing structuring evaluation, in coordination with the tax advisors to HPE Fund IV and its limited partners.
VI. State Payroll and Withholding Tax Considerations
Pennfield employs approximately 8,400 individuals across 34 states. As an employer, the Company

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