In a series of articles, we will discuss six key tax and HR issues to consider before putting boots on the ground in the US. First subject: state vs. federal taxation.
Businesses operating in the United States are subject to two levels of taxation, federal and state. However, the existing double taxation treaty between the United States and the UK is not applicable to the states—a source of confusion for many UK companies expanding their business into the US market and getting ready to put boots on the ground. Although you may have no taxable presence due to treaty protection at the federal level, you may have exposure to taxation at the state level. Due to a landmark US Supreme Court case decided in June 2018, a taxable presence (a “nexus” in tax speak) in one of the 50 states can be created not only by a physical presence but by mere economic presence. The implication is that you could be exposed to state taxation in most of the 50 states without having a single office or full-time employee anywhere in the United States. While each state has enacted its own tax laws, there are some common trip wires.
What to Watch For
- Economic Presence: Do you have more than $100,000 annual sales in a state or more than 200 transactions? This small level of activity will create a taxable presence (economic nexus) in most states, which causes sales tax, administration and filing obligations and possibly income tax filing.
- Physical Presence
- Onsite Services: Do you have employees working temporarily in a state—perhaps engaged in installation, maintenance, training, and the like? A few days’ presence may be enough to create state nexus.
- Assets: Do you have inventory, machinery, or other assets (e.g., inventory in consignation, machine rental or operational lease, demo items) situated in the United States? Most states consider assets to be indicative of nexus.
- Employees: Are there employees based in a state working from their home offices? Payrolled employees is a strong indication of nexus.
The Impacts of Compliance Obligations
Depending on the state where you have a taxable presence, you will most likely need to:
- Legally qualify to do business (if only to get a secretary of state number required for the next step)
- Register for various types of tax such as sales/use tax, corporate income tax, payroll tax, and personal property tax
- File sales- and use-tax returns and payroll tax returns, potentially monthly
- File income tax returns and personal property tax returns annually
Sales tax rates approach 10% in some states, which may have a significant impact on your business. And other potential tax obligations are critical to assessing your business’s potential tax burden as you expand into the US market.
Caution: Change Coming
As of this writing, most double taxation treaties, including US-UK, do not consider the mere presence of inventory for delivery or display purposes a condition that creates a permanent establishment for federal tax purposes. But count on this matter to be revisited and revised—and soon. Discussions about this issue at the OECD level are under way. The influence of the US Supreme Court’s ruling allowing states to characterize tax presence based on economic activity has likely been profound —showing the way for other countries on how to tax e-commerce.
Before embarking on an adventure and setting up on US soil, it is particularly useful to review the operational aspects of your project with a US tax specialist. Very often with small changes well adapted to the US territory and its culture and with a minimum of precaution it is possible to limit the number of jurisdictions to which you will be exposed and thus simplify and limit your administrative costs.