State Tax Implications for Multinational Companies

By:
Nicole DeRosa, CPA
Published Date:
Nov 1, 2014

As if the ever-changing state and local tax laws and regulations aren't complicated enough for U.S.-based companies, multinational (i.e. foreign, non-U.S.) companies have it worse. For such company, failure to consider state and local tax implications when deciding to expand to the United States could have costly consequences.

State Audits

The state and local tax arena has become very active as of late. Historically, state audits were a compliance evaluation measure; however, now more than ever, audits are viewed as a means of generating revenue. Among the U.S. states, counties, and municipalities, there are more than 6,000 different jurisdictions that impose some fee or excise that can be labeled a tax. Taxing authorities are getting smarter and readily sharing information across state borders, which results in more multistate audits. States also are initiating audits with taxpayers regarding one tax type and are subsequently examining other tax types. Multinational companies without the guidance and knowledge to challenge these assessments are especially vulnerable to such initiatives.

U.S. Taxation of Foreign Company Income

The IRC and tax treaties generally guide U.S. taxation of the income from foreign companies. Under the IRC, a foreign company can be taxed on its taxable income that is effectively connected with the conduct of a trade or business within the United States. In addition, a 30% flat rate withholding tax applies to fixed or determinable, annual or periodical (FDAP) income from U.S. sources but not connected with a U.S. trade or business. Interest, dividends, rents, royalties, and similar types of income from investments are types of FDAP income. Unlike the IRC, tax treaties are designed to reduce the possibility of double taxation and to allocate between governments the right to tax international transactions. Tax treaties can modify the provisions of the Code and therefore serve as a way to entice foreign companies to invest and do business in the United States, which currently has bilateral income tax treaties with approximately 68 different countries.

Foreign companies operating in the United States must understand that, despite receiving protection under a federal income tax treaty, state and local income/business/franchise taxes still often apply because states are not required to follow federal tax treaties. State tax laws vary tremendously. Some states will not subject non–effectively connected income to tax if the business is domiciled in a country under treaty with the United States. Most states, however, will tax income if nexus (state-defined taxable connection) exists between the state and the foreign business.

State-Specific Provisions

CPAs must be mindful of the state specific provisions and guidance that addresses foreign-sourced income. New York, for example, states that "[e]ntire net income shall include income within and without the United States" any income that was not included for federal tax purposes will still be included when calculating New York entire net income. Many states offer a variety of incentive programs that are designed to encourage both domestic and foreign companies to locate new facilities or expand existing facilities within their borders. Multinational companies should investigate such programs when investigating locations in which to expand.

In addition to income taxes, non-U.S. companies must understand the unusual features of state sales and use tax, compared to that of value-added-style transaction tax (VAT), which is common in many foreign jurisdictions. Among the 46 states and the District of Columbia and their myriad localities that impose a sales and use tax, the combined state and local tax rates range from around 3% to more than 9%. Such costs of sales and use tax should be factored into a company's pricing strategy in order to ensure that expected profit margins are not diminished as a result. It should be noted that if a company fails to collect and remit sales tax, the cost of the tax could fall upon the seller. Profit margin should be calculated on purchases of products that might impact a seller's bottom line, but the sales tax is ultimately paid by the purchaser

The Bottom Line

The bottom line for a multinational company considering entering or expanding their business in the United States is this: do your homework and seek advice from state and local tax practitioners.


Nicole DeRosa, CPANicole DeRosa, CPA, has over six years of public accounting experience in taxation working with clients in an array of industries. She is a member of WithumSmith+Brown’s International Services Group, State and Local Services Group, and National Tax Services Group. She also teaches tax accounting as an adjunct professor at Raritan Valley Community College. She can be reached at nderosa@withum.com.

This article originally appeared in the September 22, 2014 issue of SALT SHAKER. Copyright, WithumSmith+Brown, PC, 2014, reprinted with permission.

 
Views expressed in articles published in Tax Stringer are the authors' only and are not to be attributed to the publication, its editors, the NYSSCPA or FAE, or their directors, officers, or employees, unless expressly so stated. Articles contain information believed by the authors to be accurate, but the publisher, editors and authors are not engaged in redering legal, accounting or other professional services. If specific professional advice or assistance is required, the services of a competent professional should be sought.