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A foreign company exports product to US distributor. Is foreign entity exempt from U.S. sales tax if there is tax treaty?

Full Question: A Phil. food company is presently manufacturing products in the Phils and exporting these products to a US distributor. The Phil Co. has plans to engage a US Toll Manufacturer to produce food products (under full toll arrangements) under the Phil Co.'s brand name for delivery to the US distributor. Under such arrangement, the Phil Co. will purchase the toll manufactured products from the US Toll Manufacturer (to establish ownership of the products) then have the products delivered/sold to the US distributor. The state involved will be California. Will the Philippine company be required to establish or register a US entity(under Federal or California tax laws) - rep office, branch or a company or can they go ahead with this arrangement without formally establishing any US entity? Can the Philippine company be exempt from federal and sales tax? Phil has existing tax treaty with US.

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Diane Yetter photoYour specific question is very fact specific and we can't provide a definitive answer in this post. In addition, this post will only address sales and use tax concerns. For income tax, corporate registration or business structure, you will need to consult with specialist in those areas. However, here are some general guidelines to help you. There is no prohibition against a state imposing a sales and use tax obligation on a foreign entity. To the best of my knowledge any treaties between the US and a foreign country do not apply in the sales and use tax area. A business is required to register and collect sales tax or pay sales tax on its purchases when it maintains a presence in the state. This is defined in each state but also controlled through the US Constitution and a number of court cases over the years. If you own property in the state, whether real or tangible, this will generally create "nexus" or a presence in the state such that you would be subject to the state laws. Presence can also be established through the use of third party agents who operate on your behalf. It sounds like the US Toll Manufacturer may be operating as your agent in California which likely would create nexus for the Phil company. It sounds like your sales will all be for resale so there may not be a sales tax collection responsibility. However, in order to issue a resale certificate to your suppliers that will be delivering to you in California, you must be registered as a retailer. In addition, to the extent that you own other property or buy supplies or assets, these are likely taxable and tax must be paid on their purchase. If the vendor does not charge tax because they do not have a presence in the state of delivery, then the purchaser has the obligation to remit use tax to the appropriate state. If you need further assistance we are available to provide sales tax consulting services.

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