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5 U.S. Tax Tips for International Startups

May 28, 2024

International startups need to be able to navigate the complexities of taxes when doing business in the U.S. — whether you plan to establish a U.S. subsidiary or create a U.S. topco. In this video, you’ll learn about five crucial factors at play with U.S. taxes, including nexus, sales taxes, miscellaneous taxes, state vs. local income taxes and apportionment.


John Clausen:

Hi, I am John Clausen, state and local tax partner with EisnerAmper. In this video, I'll cover five things international startups need to know about state and local taxes in the US when they begin doing business in the U.S. Whether you plan to establish a US subsidiary or your investors are just asking you to create a US topco, this information will apply to you. So the first thing I'm going to talk about today is the concept of nexus. Nexus is the level of activity that a state will consider to cause a filing requirement. It's good for you to know where you have filing requirements or where you have nexus. Many states impose filing requirements on businesses even when the business doesn't have a physical presence in the state. Normally, once a business succeeds a certain level of sales in the state, then they're considered to have economic nexus.

Second item I want to talk about today are sales taxes. What is a sales tax? A sales tax is a consumption tax based on the sale of a good or a service. The tax is collected by the seller and then remitted over to the government agency imposing the tax. 46 out of 50 states impose sales taxes, and all of the states imposing sales tax have enacted an economic nexus step. Companies that don't collect taxes might find it difficult or even impossible to retroactively later collect taxes from their customers. But companies can avoid penalties by coming forward and contacting governments before they get contact. The third item I'm going to talk about are miscellaneous taxes such as non-income taxes, franchise taxes, minimum taxes. These are imposed by cities and states and some of the larger cities in the US that have these taxes include San Francisco, New York, and Philadelphia, and Los Angeles.

Some of the states imposing these types of taxes include California with its minimum tax. Massachusetts has a minimum tax on corporations and a franchise tax as well. Ohio and Oregon both have what's called CAT taxes that are based off of gross receipts with Oregon giving you a special deduction for cost of goods sold. And New York and New Jersey both have minimum taxes that can apply. Texas has a franchise tax based on gross margin, and Washington has a business and occupations tax that's based on gross receipts. This is just a sample of the types of miscellaneous taxes that can apply. There are several others that I didn't mention here, but it's definitely something that companies need to watch out for when doing business in the United States. The fourth item I want to talk about are that state income taxes are computed differently from federal taxes. For example, there are adjustments to state income taxes, even though states start with the federal taxable income as their starting point.

There's adjustments such as depreciation and state income and foreign income taxes that either are additional deductions or deductions for federal that you don't get per state. And there can also be types of income that's non-taxable for federal or per state, or vice versa. So those are adjustments to look out for when preparing your state income taxes. Further, some states don't actually conform to federal tax treaties with foreign countries. So you may have situations where you don't have to file a federal tax return because of the tax treaty. However, states don't often adopt the federal treaty, which means you could have a state filing requirement even though you don't have a federal tax filing requirement. And lastly, the fifth item I want to talk about today is the concept of apportionment. Apportionment applies once a company starts to do business in more than one state, and it's the way that companies figure out how much income gets taxed in the various states where they do business.

And something to watch out for is that states can sometimes source revenues based on where the performance of a service happens, or they might source it based on what's referred to as market-based sourcing where their customer is located. And so you can have situations where you're performing a service in a state that sources based on where the service is performed, and then you're performing it for a customer in a state that bases sourcing on where the customer is located, which means you'd have to pick up the income from the same transaction in both states.

And the flip side can happen where you're performing the service in a market based state for a customer that's located in a location of service performed state, and you wind up not having to pick up the income in either state, and that's called nowhere. So these rules can be a trap for the unwary or they can represent an opportunity, but definitely something to be aware of. Navigating state and local taxes in the US can be complex. Now that you're aware of these five crucial factors at play when doing business in the US, you'll be better positioned to comply with the laws, avoid penalties, and achieve success internationally. Please reach out to start a conversation with us. Thank you.

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John Clausen

John Clausen is a Tax Partner in the firm's State and Local Tax Group. With 30-years of experience in public accounting, John’s expertise focuses on state and local income taxation.

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