Often when I blog on U.S. Sales Tax for Foreign Sellers I blog based on questions my clients are asking or information and updates I'm providing. One topic I often discuss with my foreign (non-U.S.) clients and other foreign sellers that send questions my way, is the topic of “other” U.S. state taxes that a foreign seller may be subject to.
That’s correct! A foreign seller may have an obligation to file (lodge) and pay state taxes other than a state’s sales tax.
And indeed this topic is fresh in my mind because it just so happens that today I am quite busy preparing and filing the Texas Franchise Tax return for several of my foreign Amazon FBA clients. This is because the Texas Franchise Tax is one such example of an “other” type of state tax that foreign sellers may be subject to.
You see, in the same way that a foreign seller may be required to register, collect and remit (pay) sales tax on product sales to U.S. consumers, a foreign seller may also be required to file (lodge) and pay “other” types of state taxes. This is because the various states rules may require that a foreign seller who engages in certain activities has “nexus” for a state’s corporate income, franchise, gross receipts or other business taxes. (Remember having “nexus” means that the foreign seller has made a sufficient “connection” to the state according to a state’s laws to require the foreign seller to comply with those laws.)
And so today I thought it would be a good idea to write a post with some key points that foreign sellers should know about “other” types of state taxes they may have an obligation to comply with. Thus, without further adieu, here are 7 key points that foreign sellers should know about “other” types of state taxes:
- Tax Treaties do NOT Exempt Foreign Sellers from State Taxes: Even though a foreign seller that "engages in business" in the U.S. is from a country that has entered into a Tax Treaty with the United States, our various States are not a “party to” or bound by any bi-lateral Tax Treaty that our U.S. government enters into. Therefore, although a foreign seller may be exempt from U.S. federal taxation because they meet the bi-lateral treaty provisions, the same seller could still be subject to a state’s various tax obligations. (You can read more about on this at my prior post: Tax Treaties and U.S. Sales Tax Nexus: What Foreign Sellers Need to Know)
- A Foreign Seller Can Have Nexus for Various Types of State Taxes: A foreign seller may engage in activities in the U.S. that create “nexus” with our various states for sales, corporate income, franchise, gross receipts or other state business taxes. Examples of activities that can create “nexus” for various types of state taxes include: 1) Having product inventory (stock) in a U.S. fulfillment center where the seller continues to own the product inventory until it is sold and shipped to a customer, and 2) using an “agent” to solicit sales, fulfill orders or perform a variety of other duties on behalf of the seller. (You’ll recognize these two as key activities that Amazon FBA sellers engage in.)
- States Have Different Nexus Rules for Each Type of State Tax: In addition to each state being a separate and independent government with its own set of rules and regulations, within each state you will find separate rules for each type of state tax. That’s right! A specific state will have one set of rules for whether an out-of-state (and that includes a foreign) seller has “nexus” for sales tax purposes and a separate set of rules for whether an out-of-state/foreign seller has nexus for a state’s corporate income or franchise tax.
- A Foreign Seller Can Have Nexus for One Type of State Tax but Not Another: Because there are different rules for each type of tax (even within the same state), a foreign seller can have nexus for one type of tax but not for other types of state taxes imposed by the same state. As a general rule, the threshold for sales tax nexus is often lower than it is for corporate income tax nexus – this means that a foreign seller may have nexus for sales tax purposes, but not necessarily for the same state’s corporate income tax. However, another general rule is that a foreign seller that has nexus for sales tax purposes, will also have nexus for franchise tax purposes (as an example if you’re a foreign Amazon FBA seller with sales tax nexus in Texas, you are also subject to the Texas Franchise Tax).
- Unlike Sales Tax, Other State Taxes are the Seller's Out-of-Pocket Expense: The sales tax is charged and collected from the final consumer (usually at the point of sale) and reported and remitted (paid) by the seller. In effect, the final consumer is the party that pays the sales tax and the foreign seller is simply collecting and remitting the sales tax to the state or local (city, county or district) government that it belongs to. However, a state’s corporate income, franchise, gross receipts or other business taxes are paid by the foreign seller. Thus, these other state taxes are an out-of-pocket expense of the seller.
- Failing to be in Compliance with the Various State Tax Rules Can Have Serious Consequences: Many foreign sellers – especially those who are just becoming familiar with the U.S. sales tax requirements – are not aware of or do not consider that they might also be subject to other states taxes in addition to their sales tax collection and remittance obligations. If you are working with a tax advisor or managing your own sales tax filings and remittances (such as through a sales tax software program), it is extremely important to make sure you (and/or your tax advisor) are aware of and can advise you on what is necessary to comply with a state’s various tax obligations. Failing to comply with these "other" state tax obligations could lead to assessments and a state revoking a seller’s sales tax permit.
- Selling in the U.S. Can Create Many State Tax Obligations for a Foreign Seller: The final and important point – there is a lot to know about selling in the U.S. and the various state tax obligations this creates. These go beyond simply complying with a state’s sales tax requirements.
As you can see from the 7 points above, there is a lot to know and consider when seling in the U.S. Which is why I'll be writing in more detail about some of these key points. So stayed tuned - there's more to come.
Other recent “U.S. Sales Tax for Foreign Sellers” posts by Sylvia F. Dion, CPA:
- Wayfair & Economic Nexus for Foreign Sellers: Key Sales Tax Questions
- U.S. Sales Taxes: Filing Frequency for International Sellers
- 7 Key Points Foreign Sellers Should Know about U.S. State Taxes
- Do International Sellers Registering for Sales Tax Need a U.S. EIN?
- International Sellers and U.S. Sales Tax Registration: 3 Key Issues