Unfortunately, many international businesses are under the assumption that since they do not have permanent establishment (PE) for federal income tax purposes, they do not have a responsibility to collect sales tax. That assumption could not be further from the truth. In general, states do not recognize United States Federal Income Tax treaties because they are not “party to” bi-lateral agreements. However, many of the activities that do not create a PE do create nexus for sales tax purposes. These activities include maintaining the foreign entities inventory for the purpose of storage, display or delivery. States do not care if you are a domestic or international business; if you are doing business in their state they require you to collect sales tax on sales into their state. So what is an international business with no office, employees or accountant in the US to do? First, let’s help you understand the concept of doing business or what most states refer to as nexus.
Nexus is a requirement for taxation of interstate transactions under both the Commerce Clause and Due Process Clauses of the US Constitution. It is defined as a substantial physical presence in the state, but different states have different determinations for what qualifies as a substantial physical presence. Nexus is a determining factor in whether an out-of-state business (our out-of-country business) selling products or services into a state are liable to collect sales tax in that state. Factors to consider when determining nexus include maintaining employees or property (including inventory) within a state. However, a temporary physical presence can sometimes trigger nexus. Let’s look at a specific example: Pennsylvania.
Pennsylvania imposes a sales tax on the sales of tangible personal property and specified services within the state. This sales tax is required to be collected by the vendor who is doing business in Pennsylvania. Pennsylvania definition of doing business includes maintaining a stock of goods in the state.
Illinois imposes a retailer’s occupation (sales) tax on persons engaged in the business of selling tangible personal property to buyers for use or consumption, and is measured by the seller’s gross receipts from such sales delivered to locations within Illinois. A retailer maintaining a place of business in the state includes having in Illinois, directly or by a subsidiary, an office, distribution house, sales house warehouse, or other place of business.
In general, maintaining inventory in a state will create sales tax nexus. However, until recently states did not have many methods to enforce these requirements on international companies. What has changed? As part of a broader effort to co-operate with state tax laws companies such as Amazon have been urging sellers to comply with state sales tax laws. Although Amazon cannot force international businesses to collect sales tax they can threaten to limit business activity with them if they do not comply.
How does an international business comply?
Step 1 – Find an expert. The sales tax experts at PM Business Advisors are part of a small group of service providers that are experienced in helping international businesses comply with complex sales tax laws without creating PE.
Step 2 – Determine if a nexus exists. There are many factors that may create nexus and each state may apply those factors in a different manner.
Step 3 – Acquire a Federal Employer Identification Number. This is complicated for international companies not desiring to establish a PE.
Step 4 – Register for a sales tax id number. This is also complicated for international companies due to the information required by most of the applications, such as a US-based officer, and physical locations in the US.
Step 5 – Comply. Once you have a sales tax id number you are required to file monthly, quarterly or annual sales tax returns. You have several options and you can check out our COMPLIANCE section to review those options.
Step 6 – File your 1120-F Protective Return. PM Business Advisors will assist you in working with a US-based CPA to assist you in filing the 1120-F.
Things to avoid:
- Creating PE through your business activities in the US
- State income tax
- State and Local business registration requirements