Conducting business across international borders is a commonplace occurrence in today's economy as a result of the expansion of global markets, the Internet, and other recent technological developments. But the state tax treatment of non-U.S. based entities doing business within the United States can be difficult to ascertain and unpredictable. The Bloomberg BNA 2013 Survey of State Tax Departments, which will be published on April 26, asked state department officials several questions aimed at eliciting further insights on this issue.
At the federal level, non-U.S. entities can rely on treaty provisions to offer guidance on the tax consequences of most types of transactions. Under the bilateral tax treaties, a non-U.S. company generally is not subject to U.S. tax on business income derived in the U.S. unless the income is attributable to a permanent establishment in the U.S. The definition of "permanent establishment" varies by treaty, but it is generally defined as a place of management, an office, a construction site, or an agent of the non-U.S. company with authority to enter into contracts.
At the state level, whether a non-U.S. entity is subject to tax depends on the entity having nexus with the particular state. Most states adhere to an economic nexus rationale for income taxes, which does not require a physical presence. As a result, a non-U.S. company can achieve nexus with a state even if it lacked a permanent establishment.
Another question is whether a state extends the protection afforded under Pub. L. No. 86-272 to non-U.S. entities. Public. L. No. 86-272 prohibits the imposition of state income-based taxes against businesses engaged in the sale of tangible personal property whose activities in the taxing state are limited to the solicitation of orders. This protection applies "interstate commerce," but not to foreign commerce. States have the option, however, to extend the protection to foreign commerce.
If nexus with a state is established, the non-U.S. entity's actual tax liability would depend on the state's starting point for computing its income tax. The starting point in "water's-edge" states is taxable income within the U.S. Under this method, if a state starts its computation with federal taxable income, assuming that the state does not require an addition of treaty-exempt income, then the company's tax liability would be zero.
But not all non-U.S. entities qualify for this treatment because of the so-called "80/20 rule," which is the main method that the states use to determine if a non-U.S. corporation should be included in a combined group for water's-edge purposes. Under this rule, a state that requires or permits the filing of a water's-edge combined return will exclude from the combined return a non-U.S. entity whose income apportionment percentage outside of the U.S. is 80 percent or more. But there are variances in the method used by the states to determine if a non-U.S. based company has met this standard.
In a state that begins its computation with world-wide income, a non-U.S. entity could have state tax liability even if it had no federal income tax liability. Because nearly every state uses federal income as the starting point for computing taxable income within their jurisdiction, non-U.S. based entities must begin the state computation process by completing a "pro forma" federal tax return.
Bloomberg BNA asked each state specify if it:
By Steven RollFollow us on Twitter at: @BBNATax
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)