Foreign sales into the U. S. may find increasing tax compliance issues. In the past, if your foreign company was located in a treaty country and had no physical presence, office, warehouse, etc. within the U.S. and simply had sales to U.S. customers without stepping foot on U.S. soil, you may not have given much thought to any U.S. federal income tax filing requirements. After all, your company has no permanent establishment, right? You haven’t even hired any subcontractors or employees in the United States! All the work to manufacture and sell your product has been from within the boundaries of your own country, and you are merely shipping the final product directly to customers. The old problem with this thinking is that not all states follow the treaty and a state income tax return may have been required. You see, the idea of permanent establishment, where you must have a physical presence in the U.S. to worry about filing and paying taxes, is more of a federal rule. States, on the other hand, have their own set of rules.
Recent legislation has emerged from many states after the Wayfair decision. So not only might your foreign company have a state income filing requirement, you may now have state sales tax filings required. The Wayfair case opened up a whole new avenue for states to raise revenues by demanding sales tax and income tax be collected on sales to customers within their state where the seller had no physical presence. Many states are now also requiring income tax filing if out-of-state businesses reach a certain economic nexus threshold of sales within that state. U.S. businesses have been introduced to these new sales and income tax filing requirements over the past few years, however, foreign businesses also need to be careful as they may not be thinking of state rules when reviewing their compliance issues.
So, what does this mean if your foreign company has a state sales tax or income tax filing requirement but not a federal income tax filing requirement? If your foreign company is exempt from federal income tax under a tax treaty because there is no permanent establishment, you may also need to file a nonresident income tax return and attach a treaty-based return disclosure to invoke the treaty.
Please be sure to contact a qualified U.S. tax advisor to review your tax compliance needs and assist with your registration and filings. More and more states are quickly jumping on board with new nexus rules and it is important to stay up to date on compliance. Each state has its own rules and regulations to determine when nexus has been established. Penalties and interest can add up for missed filings.
This information is general in nature and should not be relied on. Please contact your Henry+Horne advisor if you have questions or concerns regarding how this may affect you.
Jill A. Helm, CPA