For many business owners, expanding to the U.S. can be an overwhelming endeavor. If you are currently planning an expansion, it is important to consider how your organization will be affected by U.S. taxation. This includes understanding which areas of multi-state taxation are relevant to your business, preparing in advance to comply with guidelines, and avoiding fees and penalties that could put your entire expansion effort in jeopardy.
What is multi-state taxation?
In the U.S., each of the 50 states has its own tax regulations and various government departments to enforce those regulations. In the beginning stages of U.S. expansion, it is important to examine which states your business will operate in. While this may seem like a straightforward task, the implications can be more complex, depending on how and where you’re conducting business.
Most states (with a few exceptions) have more than one tax requirement. The two most common multi-state tax types are income and sales taxes. If this sounds overwhelming, that’s because it usually is, and without acquiring expert assistance tailored to your specific operations, taxation will only become more complicated as you continue your expansion efforts.
Consider the volume of sales and location of buyers
Taxation in the U.S. will not only vary from state to state, but also based on the volume of sales in each location. Generally, the higher the volume, the higher and more involved the tax obligations will become. When seeking consultation about multi-state tax implications in the U.S., you should have an idea of what your sales volume will look like initially, how it could increase down the line, and where the bulk of your customers are going to be located.
For example, if you’re marketing specifically to consumers in Michigan, you’ll want to be particularly prepared to comply with Michigan tax laws, regardless if you are originally incorporated in Michigan. It is critical that you obtain legal and financial advice from a trusted source that can educate you on the obligations in each of the 50 states or refer you to someone who can.
Consider the location and function of employees
Depending on your business model, you may have employees performing different functions in various states. Although it is not a direct tax of the employer, U.S. businesses are required to register for employee income tax withholding in the states in which employees reside and/or work. Payroll service providers can assist with the collection and remittance of this employee withholding tax. More importantly, if you have an employee living, working, or providing certain duties in a state, the business may be required to register for, meet filing requirements and pay income taxes in that state as well. Each state has different regulations on this topic.
Value-added tax (VAT) vs. sales tax
Many foreign companies expanding to the U.S. are familiar with value-added taxes (VAT) and are interested in its application in multi-state taxation. VAT does not apply in the U.S. The U.S. gross receipts tax is most often compared to as sales tax, but there are many underlying differences. Unlike VAT being applied at every step of the supply chain, U.S. sales tax is only assessed to the end user of a product or service. Each state defines their sales tax rate, taxable transactions, and filing requirements differently. It is important to work with an expert to address this area of sales tax, as it is very highly scrutinized by state authorities.
Business model tax considerations
When considering multi-state taxation in your expansion to the U.S., be prepared to explain your business model to your consultants. Whether your business will be a B2B (business-to-business) or B2C (business-to-consumer) operation impacts what state taxes you will be responsible for collecting and remitting or filing and paying. For example, many states have sales tax exemption for B2B manufacturers or wholesalers, but not for B2C retailers.
Another consideration in how businesses are taxed depends on whether they operate in a physical location or virtually. States are quickly abandoning their old taxation standards of brick-and-mortar locations. State jurisdictions are now adopting standards based on levels of economic activity, such as revenue thresholds and number of transactions. This is even more prevalent right now as many businesses shift towards e-commerce due to the pandemic. All businesses need to be aware of different physical or economic nexus requirements in the states where their customers are located.
Tips going forward
To minimize unnecessary multi-state exposure and unwelcome surprises, it is imperative to consider multi-state tax laws from the very start of your expansion efforts.
Here are some key tips to consider:
- Call upon trusted advisors or quality research to make sure you understand the applicable state tax laws as they apply to your business.
- Track revenue properly by understanding the difference between addresses billed, and addresses to which you ship. Various tax requirements are most commonly based on where the actual transaction is taking place and where the good or service is being used. In addition to tracking revenue location, the location of fixed assets and inventory could result in cumbersome filing requirements that could be avoided with proper planning.
- Consider where your employees are located, as this could have a significant impact on your tax obligations. With the work-from-home philosophy arising out of the pandemic becoming permanent for many employers, multi-state tax repercussions may be more significant and more long-term for many companies.
As you’ve likely known from the outset, there is a lot to consider when expanding your business to the U.S. While all of this can rightfully seem like a lot to manage, the good news is there are plenty of resources you can (and should) utilize going forward with your expansion. The overall advice here is to have multi-state taxation on your radar, period.
As a leader in global expansion consulting, we can assist you in planning for the multi-state tax impact on your U.S. operations. We work closely with foreign companies of any size who are interested in taking advantage of the opportunities in the U.S. market. We are confident in our ability to tailor solutions for your subsidiary to not only meet the needs required by law but also to exceed expectations so your business has room to thrive. Our team is ready and excited to help every step of the way. For additional information, call us at 248.208.8860 or contact us directly. We look forward to speaking with you soon.