Alerts and Updates
Does Your Foreign, International or Interstate Business Have a Hidden and Costly State Tax Liability?
March 10, 2006
Foreign, International and Interstate Businesses
Contrary to common belief, a foreign, international or interstate business, including a foreign subsidiary of a domestic company, may have a state tax liability even if such business does not have an office in a state, but it has an employee, agent or third-party representative traveling into a state. Similarly, having consigned inventory, leased property, intangible or tangible property or other types of presence in a state can subject a foreign, international or interstate business to state taxation. This state tax liability can extend to state franchise taxes, income taxes, sales/use taxes, business taxes and excise taxes. Depending on the type, extent and duration of the in-state activity, and the revenues or income of the business, a foreign, international or interstate business can be subject to thousands, if not millions, of dollars in taxes of which it may be totally unaware.
Permanent Establishment Rules Provide Limited Protection
Whether or not a foreign or international business has a permanent establishment in the United States is generally irrelevant to whether that business is subject to a state franchise, business, sales/use or excise tax. If a foreign or international business has presence in a state through traveling salesmen, servicemen, other employees, agents or third-party representatives, tangible or intangible property, inventory, etc., it can be subject to that state's tax jurisdiction. While it is true that many state income taxes start with federal taxable income, so a foreign or international business with no permanent establishment in the United States will have no federal taxable income and thus no state income tax, this is not universally true. Some states require such businesses to file pro forma federal tax returns in such instances showing a taxable income amount, and other states even have laws that specifically re-impose their taxes on such businesses.
What Should You Do
If your foreign, international or interstate business has any presence or activity in a state, you should consider undertaking an immediate review of its state tax exposure. Taking action now may avoid an unwanted and costly surprise in the future if a state finds you before you find a solution.
For Further Information
If you have any questions about this Alert or would like more information, please contact any of the attorneys in the Tax Practice Group or the attorney in the firm with whom you are regularly in contact.
As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
