Early in my post, I mentioned that states are not “parties to” or “bound by” bi-lateral tax treaties. This means that even if a foreign seller engages in an activity that does not create a PE (and does not subject the foreign seller to U.S. Federal income taxation) these same activities can subject a foreign seller to a state’s sales tax laws.
In the U.S. we use a term called “nexus”, which means a “connection or tie”. When we say that a business has “nexus” to a particular state, this essentially means that the out-of state (or out-of-country) business has a sufficient connection to a state to allow that state to subject the business to the state’s tax requirements. For sales tax, the requirements that an out-of-state (or out-of-country) business can be subject to include being legally required to collect sales tax on sales to customers in the “nexus” state.
Explaining the concept of nexus and how nexus affects foreign sellers is another complex topic – and one that I plan on devoting an entire post to in the future. There is also a very significant development occurring in the U.S. right now, which involves the potential enactment of a Federal proposal called the Marketplace Fairness Act. If this proposal becomes final law, it could have a huge impact on foreign sellers. I plan to cover this topic in a future post as well.
However, for this post, foreign sellers should know that having a physical presence, such as owing or leasing warehouse space, or maintaining inventory in a state will create a sufficient connection for sales tax nexus to apply. Actually, every activity listed above as “acceptable” for avoiding a PE, is one that would create sales tax nexus in practically every state. Incidentally, many state sales tax laws specifically say that “maintaining, occupying, or using, through a subsidiary or agent, an office, place or distribution, sales or sample room, warehouse, or storage point” in their state creates nexus.
Another activity that many state sales tax laws say creates nexus is engaging independent contractors who act in an agency capacity. So while an independent agent might not create a PE for a foreign seller, an independent agent will most likely create sales tax nexus in any state in which they represent the seller even if they are not working exclusively for the foreign seller.
The U.S. sales tax rules are complex even for U.S. based companies – and can be even more confusing for foreign sellers. The fact that states are not a “party to” a bi-lateral tax treaty entered into by the U.S. government may be surprising to some foreign sellers who have assumed that avoiding a PE means that they will also avoid state sales tax requirements. But the very activities that are “acceptable” and will avoid a PE, like keeping inventory in a state, or using independent agents, are activities that will require a foreign seller to register and collect sales tax on sales to U.S. customers in the nexus states. And while some foreign sellers may believe that the states will not become aware of their U.S. selling activity, states are becoming more aggressive about identifying “non-compliant” foreign sellers, such as by looking at customs information on shipments. Yes, a bi-lateral tax treaty does not protect a foreign seller from the U.S. sales tax rules!
If you’re a foreign seller (in any industry) who wants to get a better understanding of the U.S. sales tax laws and how they apply to foreign sellers, then I invite you to follow my “Sales Tax for Foreign Sellers” posts here at The State & Local Tax “Buzz” blog.
*Note: In 2006, the United States Treasury Department reissued its U.S. Model Income Tax Treaty, which is a starting point (from the U.S. perspective) for negotiating an income tax treaty with a foreign country. The definition of a PE in the OECD Model Treaty Convention and the 2006 U.S. Model Income Tax Treaty are almost identical.
Like this post? Click on the “SHARE” link to Share It on Social Media
If you would like to translate this post to a different language, click on the menu above to open Google Translate and select your language
Are you a foreign seller interested in a tax consultation? Submit a contact request or email Sylvia Dion at email@example.com
This post was originally published on SalesTaxSupport* and is now available here at The State & Local Tax ‘Buzz’ Blog. This is one of several posts on U.S. Sales Tax for Foreign Sellers here at The State and Local Tax ‘Buzz’ Blog.
About the Author: Sylvia F. Dion, CPA is the Founder and Managing Partner of PrietoDion Consulting Partners LLC, a State & Local Tax (SALT) Consulting firm providing comprehensive tax services to U.S. and International businesses. Sylvia’s 25 years of multi-faceted tax experience includes holding leadership positions with some of the highest regarded international accounting firms and providing SALT services to companies around the world. From 2011 through 2019, Sylvia also served as a contributor to the SalesTaxSupport* blogs, where she blogged on Internet Sales Tax and Economic Nexus, U.S. Sales Tax for Foreign Sellers and Massachusetts Sales Tax. Sylvia is also a speaker and author whose articles have been published by Bloomberg BNA and in other leading professional tax journals and is the author of “Minding Massachusetts,” a quarterly column published by Tax Analysts’ State Tax Notes. Sylvia is also fluent in Spanish. For more about Sylvia visit the her firm website at www.prietodiontax.com or www.sylviadioncpa.com. You can follow Sylvia on twitter and on Google+ and can contact Sylvia via e-mail at firstname.lastname@example.org
*SalesTaxSupport was formerly a sales tax resource website which closed on March 1, 2019. Many of Sylvia’s posts previously published on SalesTaxSupport have been republished here at “The State and Local Tax ‘Buzz’ ” blog.