Foreign entities expanding their business interests into the United States are often caught off guard because they have to deal with more than just federal taxation. One of the biggest challenges for foreign business entities is being subjected to state taxation agencies. Foreign companies, partnerships, and investors are surprised when they realize they have to deal with this secondary form of taxation in addition to federal taxation. Luckily, the international tax consultants at LSL CPAs are experts at helping such foreign business entities navigate the treacherous waters of the state taxation agencies.
Challenge of State Taxation Agencies
What becomes increasingly challenging for foreign business entities because the triggers for taxation differ from state to state and often involve criteria not traditionally recognized in foreign countries. In most cases, being geographically based in a state places the company under that state’s tax jurisdiction. In recent years, more and more states have switched to the “economic nexus” concept, meaning the state will have the right to tax companies even without the company having a physical presence in that state. Doing business in a specific state and reaching a certain level of sales, even if the U.S. branch or affiliate of the foreign business entity does not have a physical location in that state, can result in placing them under the jurisdiction of that state’s taxation agency.
While income tax treaties generally limit US federal income taxation of non-US corporations, these treaties do not apply for state income tax purposes. The provisions of these income tax treaties do not bind states. Therefore, foreign corporations can find themselves liable for state income taxes even though their income is subject to treaty benefits on the federal side. Also, some states determine state income tax liability by reference to the non-US company’s worldwide income, not just their US federal taxable income, and then calculate this liability by allocating a portion of the worldwide income to the state based on a formula.
California is one of the “worldwide” states and has recently switched to an economic nexus model. California provides that an entity is considered to be doing business in the state if (among other factors) the entity sells to California customers over a certain threshold. As a result, the company can be required to file income tax returns in California and pay tax on the apportioned share of its income even without being physically present in the state.
State Taxation Agencies & You
Although this content contains accurate information, it is inherently limited because of the length of the article and the complexity of the issues at hand. As a result, it presents only a partial view of the subject matter. To learn more about how these issues might apply to your foreign business entity regarding state taxation agencies or your particular tax situation from a more three-dimensional perspective, please call LSL CPAs international tax expert Yana Weaver at 714.569.1000.
