Almost two years ago (my how time flies), my husband and I took an amazing vacation on a cruise of the Mediterranean. When I returned from that trip, I wrote a blog about the nuances for foreign companies doing business in the United States as it relates to state tax issues. Income tax and sales tax in the US are challenging concepts not only for foreign companies, but also domestic companies. And as the state tax landscape has changed recently as a result of the recent South Dakota v. Wayfair (2018) decision, it may also be impacting foreign companies doing business here as well.
So, to recap from that prior blog article, and to elaborate a bit further, here are some of the major areas for foreign companies to consider as they begin doing business in the US.
The Concept of Nexus – “Nexus” is the minimum contact a company must have with a state in order for the state to be able to impose its tax laws on the company. Historically (until the Wayfair case in June 2018), companies looked to whether they had substantial physical presence in a state. As I often tell clients, consider where you have “boots on the ground”, in terms of employees, contractors, offices, and inventory (see more below) – to name the more common nexus creators. Once nexus is established, the company may be subject to the filing of income tax returns, the collection and remittance of sales tax and filing of returns, employer payroll taxes and employee withholding, and myriad other taxes which may be imposed by the state or local entities. A challenge that some foreign companies face is that they don’t realize how many different state and local agencies there are (in addition to the US federal government).
The Wayfair case introduced companies to the concept of economic nexus (Link – 8/21/17) – which essentially provides that a certain level of transactions (in terms of dollars and/or number of transactions) can now create nexus as well. So, companies can much more quickly create nexus in states in which they’ve never had any presence besides sales. And this also holds true for foreign companies which may be selling into the many United States. As of the date of this blog, over 35 states have enacted some form of economic nexus thresholds (many are at $100,000 or 200 transactions, but there are also many variations). If your company is selling to customers in the US, you’ll need to consider the level of sales into each state to see if you have a sales tax collection and filing requirement. (We can help with that!)
“Registering” in a state can mean different things – Clients (domestic and foreign) often tell me that they have “registered” in a state. My next question is “what have you registered for?” How many different ways could a company “register” in state? Here are some different ways:
- Registering a company’s entity name for legal purposes with the state’s Secretary of State.
- Registering with the Department of Taxation or Revenue for income tax purposes and/or sales tax purposes. Some states assign the same number for both, while others assign different numbers. Registering for sales tax, or filing income tax returns does not necessarily mean you ARE registered for the other, OR that you have to be.
- If a company has employees they should be registered with the state for unemployment tax purposes.
- Registration for property taxes. This is done at the local level.
One might think that the states cross check these different registrations and identify companies who are registered with one agency but not others, but we find that that is not always the case. So, know what you are registered for!
Federal law doesn’t rule – state statutes do. As it stands today, the US federal government generally does not dictate how the states enforce their laws with respect to sales tax or income tax, provided the state’s laws are constitutional and do not double tax or discriminate. (Admittedly, this is an over-simplification of a much broader constitutional issue.) Foreign companies need to be aware that while there are certainly similarities in the tax treatments from state to state, each state is sovereign and makes its own laws with respect to taxes. So, for instance, that’s why for sales tax, an item may be taxed differently in some states than in others.
Each state has its own taxability statutes. Individual items are often taxed differently from state to state. For example, many of our clients are in the software or SaaS space, and states vary in their treatment of these items. Many states tax the SaaS revenue stream, including Washington, Massachusetts, and New York (to name just a few). However, states including California, Florida and Georgia do not tax the SaaS revenue stream. And Texas taxes it at 80%! In many states, food products sold in grocery stores are subject to an exemption. But some states simply tax food at a lower rate. Also, depending upon the food product itself – it may be taxable or exempt. In the medical field, the taxability of medical devices, prosthetics, and drug products often vary by state as well.
Things are changing rapidly – State tax laws have been based largely on principles that made sense many years ago when most of our economy was product based. Now, so much of our economy is services based and the state tax laws simply haven’t kept up. However, Wayfair and the mainstreaming of the concept of economic nexus have changed that.
Also, many state laws have not kept up with the changes in technology. Silicon Valley and other technology hubs across the country (and the world) are creating technology products and services almost daily that don’t fall neatly into some of the existing state legislation surrounding sales tax. Many states are proposing (and ultimately passing) legislation aimed at taxing more of the services and internet economies. Stay tuned as more digital products come under fire and states reach out to tax them.
Sales tax is and indirect tax, but it’s not VAT. Sales tax is an indirect tax, similar to the Value Added Tax across the globe and the GST in Canada. But that’s where the similarities end. Unlike VAT, sales tax is shown as a separate line item on customer receipts and is generally added to the posted price of the product. And as mentioned above, it is administered by each individual state (and sometimes local) jurisdiction. There are certain exemptions in sales tax, to avoid double taxation (for instance, resellers can get an exemption on items they purchase for resale), and documentation of those items is key in the process. Keeping a “paper trail” in case of audit is very important. Also note that the exemption certificates themselves may be different from state to state. Again, keeping track of the nuances across the states is often the biggest challenge foreign companies face.
Using Fulfillment Companies like FBA?
If you’re a foreign company utilizing the services of fulfillment companies (the most common is Amazon’s FBA), you may have created nexus in several states already – and you don’t even know it! This is actually one of those areas that catches not only foreign companies, but also domestic companies by surprise. As mentioned above, the concept of nexus (taxable presence) includes the location of a company’s inventory in a state. The nice part about FBA, from a business standpoint, is that fulfillment and delivery is enhanced because Amazon stores your inventory in warehouses across the US to facilitate quicker delivery to customers. The bad side of this equation is that the inventory in warehouses creates nexus – and a requirement to collect and remit sales tax (including registering in the state, filing tax returns, etc.), AND it also creates nexus for income tax purposes. So, if you are a foreign company who has engaged with the FBA program over the years, it’s a good time to talk to a professional about potential exposure that might exist.
It’s all Greek to some US companies too – you’re in good company. While this blog’s focus has been on foreign companies doing business in the US (or thinking about doing business here), many domestic companies have concerns about these things as well. That’s why we recommend to consult with a specialist in multi-state tax issues if you plan to do business in many states. Most local (and even regional) CPA firms in general practice don’t specialize in the nuances of sales tax – they tend to focus more on the income tax laws. We assist our clients at the beginning of their voyage into US state tax issues and also if they’ve been here for a while and have perhaps made some missteps. We have recently consulted with clients in Israel, the United Kingdom, China and Australia, to name a few! Again, you’re in good company. It’s so hard to keep track of all the state laws. Our role as your partner in this endeavor is to make sure you stay in compliance with as many of these laws as possible and still have time to do the main thing you came here to do – generate sales for your company and help it grow here in the US. Welcome to the States – we’re excited to do business with you! Please give us a shout if we can help.
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects. To learn more, contact us today at www.MilesConsultingGroup.com.
