We expect several state and local tax trends to impact US inbound companies in 2021. These trends include:
These areas present both challenges and opportunities. Inbound companies may not anticipate significant US state tax liabilities, and therefore may not have robust state tax resources. For example, inbound companies may not be focused on the scope and depth of US state taxation because they are exempt from federal taxation pursuant to an international tax treaty. However, treaties generally do not protect against US state taxation.
Increased activity in a state does not only impact the entity that creates that activity. If the state in question requires combined or consolidated reporting, a single entity has the potential to bring other affiliated members (even foreign members) or their activities within the taxing jurisdiction of states.
Due to a possible lack of focus on state tax, inbound companies may be especially sensitive to changes at the US state level. As a result, the impact of income tax rate and base changes, state tax audit practices, expanded consumption taxes, and state nexus expansion all serve to further complicate the US state tax exposure analysis for inbound companies.
With state legislatures starting their legislative sessions soon, we expect to experience an active first quarter when it comes to state taxation. With states experiencing significant revenue shortfalls due to the pandemic, states may propose revenue-raising laws and engage in aggressive audit activities that could impact inbound companies. Inbound companies should evaluate their US state tax exposure risk and determine whether the anticipated changes in 2021 could have a material effect on such exposure.