United States: Does Your Foreign, International or Interstate Business Have a Hidden and Costly State Tax Liability?

Contrary to common belief, a foreign, international or interstate business, including a foreign subsidiary of a domestic company, may have a state tax liability even if such business does not have an office in a state, but it has an employee, agent or third-party representative traveling into a state. Similarly, having consigned inventory, leased property, intangible or tangible property or other types of presence in a state can subject a foreign, international or interstate business to state taxation. This state tax liability can extend to state franchise taxes, income taxes, sales/use taxes, business taxes and excise taxes. Depending on the type, extent and duration of the in-state activity, and the revenues or income of the business, a foreign, international or interstate business can be subject to thousands, if not millions, of dollars in taxes of which it may be totally unaware.

Whether or not a foreign or international business has a permanent establishment in the United States is generally irrelevant to whether that business is subject to a state franchise, business, sales/use or excise tax. If a foreign or international business has presence in a state through traveling salesmen, servicemen, other employees, agents or third-party representatives, tangible or intangible property, inventory, etc., it can be subject to that state's tax jurisdiction. While it is true that many state income taxes start with federal taxable income, so a foreign or international business with no permanent establishment in the United States will have no federal taxable income and thus no state income tax, this is not universally true. Some states require such businesses to file pro forma federal tax returns in such instances showing a taxable income amount, and other states even have laws that specifically re-impose their taxes on such businesses.

If your foreign, international or interstate business has any presence or activity in a state, you should consider undertaking an immediate review of its state tax exposure. Taking action now may avoid an unwanted and costly surprise in the future if a state finds you before you find a solution.

If you have any questions about this Alert or would like more information, please contact Stanley R. Kaminski of the Duane Morris Tax Practice Group.

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