Foreign companies with activity in the US are often surprised that such activity may trigger both federal and state-level tax implications. Even more surprising is that state tax exposure may vary substantially, potentially resulting in significant state tax liabilities when little to no US federal tax obligations exist.
Foreign companies may not be used to dealing with tax authorities within a country that have such broad taxing powers. For example, states are not restricted in their taxing powers by federal limitations such as engaging in a trade or business, having a permanent establishment, or treaty restrictions. States are also not bound by uniform tax laws; each state may implement unique tax rules, making compliance difficult for foreign companies.
In this article, Joel Walters, Maureen Pechacek, and Todd Roberts explore several aspects of state taxation that are critical for owners of non-US companies to understand, including a state’s power to tax, income apportionment, state filing methodologies, tax starting point issues, treatment of foreign source income, transfer pricing adjustment considerations, registration requirements, and indirect taxes.