04.12.2015 | Serie U.S. Taxation for German Business
Part 3 - State Tax Issues
Because the states, counties, and municipalities are not parties to the treaty, some states do not respect the treaty. As a result, DeutschCo may be exempt from U.S. federal tax pursuant to various treaty provisions, but subject to various state taxes. Although a review of each state’s respect of the treaty is beyond the scope of this article, DeutschCo should know it may have some state tax exposure.
State Income tax
The state of USSub’s incorporation can tax USSub even if USSub does not conduct any business there. If USSub has activities in most states, the tax professional should consider the states of Nevada or Delaware due to their minimal reporting requirements and tax. USSub can incorporate in either state even if USSub organizes its distribution center elsewhere. (i.e., distribution center is in Wisconsin).
When a corporation earns income from business activities sourced in states outside the state of incorporation, the source states will use their apportionment factors to tax a portion of the corporation’s income. However, there must be a sufficient contact or nexus with a particular state before the state can impose a tax. USSub would still have to file tax returns in the state where the distribution center is located because the distribution center would likely constitutes nexus.
I addition to a state income tax, many states have a franchise (or capital based) tax that applies if the corporation has royalties in the state.
State Sales and Use Tax
Generally imposed on the ultimate consumer, state sales tax applies to the transfer of property (goods) and/or selected services at retail. The burden of proving that the tax does not apply lies with the seller unless the seller receives a certificate of exemption from the purchaser. The most common exemption is for non-retail sales because the policy of the sales tax is to tax the ultimate consumer on a retail sale. When goods are sold and the purchaser intends to resell the property, the sale is an exempt resale sale and not a retail sale.
A state may impose sales tax on intrastate sales, and not interstate sales. All states that levy a sales tax also levy a use tax, which is an excise tax imposed on using, storing, or consuming goods in a state. The primary purpose of the use tax is to protect in-state merchants from the competition of out-of-state sellers whose sales do not bear sales tax. Although sellers pass-on the sales and use tax to the ultimate consumer, the sellers usually collect and remit the tax. As with state income taxation, an out-of-state company must have nexus to incur liability for a state’s sales or use tax. If a business does not have nexus with a state, then the responsibility for collecting and remitting the sales or use tax reverts to the purchaser. However, if the business has nexus, which varies by state, the business must collect and remit sales tax.
Want to learn more?
Visit the free webinar with speaker Robert Misey. He is a tax attorney with the U.S. law firm of Reinhart Boerner Van Deuren s.c., which has offices in Chicago, IL and Milwaukee, WI. Previously, he served as a trial attorney with the IRS Chief Counsel (International) in Washington, DC and led the international tax services group for a region of a Big Four accounting firm. A graduate of the law schools at Georgetown University and Vanderbilt University, Robert has spoken at continuing education programs in many countries. He is an author of the books A Practical Guide to U.S. Taxation of International Transactions and Federal Taxation: Practice and Procedure. Robert has tried 23 cases before the U.S. Tax Court.
(From: German American Trade, Vol. 12 No. 5)
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