State Revenue Needs Create Opportunities and Pitfalls for Foreign Companies Doing Business in the United States
States need money. If you remember nothing else about state and local taxes in the United States, remember that. Each state has some type of obligation or demand that requires revenue and the elected officials in that state know that their jobs are at risk if they propose a tax rate increase. Once you take tax increases off the table, there are only a few options available to increase state revenue.
Two of those options should be of particular interest to foreign companies that do business in the U.S. The first is to create incentives designed to draw new business into the state. The second is to interpret existing tax rules more broadly and enforce them more stringently.
The Carrot—State Incentives
States want your business. Almost every state offers some type of program that provides incentives for companies to begin or augment operations there. Incentive programs include items like credits for hiring and property tax credits on real estate purchased.
To participate in these programs, you must plan ahead. Many incentives are available only before you start doing business in a state or before your activity in the state crosses certain thresholds. Unfortunately, there is no uniform system of state taxation or state incentives. As a result, most businesses looking to build operations in the U.S. should work closely with a U.S.-based accountant who is experienced in state and local tax incentives.
The Stick—State Enforcement
The driving force behind state taxation is the concept of “nexus,” or the extent of a business’ connection to a state. Until recently, states focused on an analysis of 3 criteria to measure the presence of a business within their borders: sales, property, and payroll. Today, states focus much more on the gross receipts a business generates within the state. This shift has left many companies surprised by a tax liability that they never knew existed until they were notified by the state. Many multi-national businesses that start operations in the U.S. will conduct activities that trigger filing and tax obligations in individual states before they reach any threshold that requires a federal filing.
For foreign companies with existing U.S. operations, a nexus study can provide some comfort that current activities have not triggered state or local obligations, or it can provide a valuable heads-up that a filing or tax obligation has been missed. States have shown a willingness to work with businesses that voluntarily disclose that they have failed to meet a requirement. As long as there’s no reason to suspect a willful failure to comply, a state may reduce the number of back years a company is required to file and waive some or all of the penalties that have accrued.
The complex requirements of each state’s system demand meticulous attention to detail from the businesses that would operate within its borders. Advance planning can help your business qualify for significant incentives that could reduce the cost of operating in a state and reduce the costs of getting your business compliant. Whether your business is planning new operations within a state or trying to bring existing operations into compliance with state laws, it’s important to work with an advisor who understands the unique rules of each state.
Top 100 CPA firm Freed Maxick supports international business’ expansion into the U.S. Contact us to learn about how we can help you avoid the pitfalls while realizing the benefits of doing business in New York or another U.S. state.