Multistate US tax issues for inbound companies: Part IV – Indirect tax considerations
In the fourth and final instalment of this series on multistate US tax issues, PwC US looks at the indirect tax considerations that must be taken into account by inbound companies.
State indirect taxation is generally any state tax that is not based on income. The most common indirect tax is a state's sales and use tax, but other indirect taxes include, for example: franchise taxes; real estate transfer taxes; telecommunications taxes; commercial rent taxes; and hotel occupancy taxes. The indirect taxes that apply depend on the nature of the company's business activities. A non-US company might be very surprised at the number of indirect taxes it must consider.
The nexus-creating activities outlined in previous sections apply generally to state income and franchise taxation. A non-US company’s exposure to sales and use taxes differs slightly than that for income and franchise purposes in that a state is precluded from extending its sales and use tax obligations on an entity unless that entity has a physical presence in the state.
Concepts of economic nexus or an intangible presence are not relevant for sales and use tax purposes; however, states continue to push the boundaries of what a physical presence encompasses. Concepts of combined and consolidated reporting are also not relevant for sales tax purposes because each entity is a separate taxpayer for sales and use tax purposes. As a result, states are very aggressive on imposing agency or affiliate nexus as a means of bringing out-of-state companies into their taxing jurisdiction.
In certain states, one of the more recent trends is the establishment of nexus due to the use of affiliate marketers for out-of-state sellers. Affiliate marketing is an internet-based marketing practice whereby an in-state third party promotes the product or service of an out-of-state seller and the out-of-state seller compensates the in-state third party for such promotion. In-state promotion from a third party is achieved by, for example, providing a link on their website to the products and services offered by the out-of-state seller. Recently, affiliate marketing has been under scrutiny with certain states passing specific legislation that creates a rebuttable presumption that an out-of-state seller engaging in affiliate marketing with an in-state third party has nexus and is therefore required to collect sales tax.
As discussed in previous instalments from this series of articles, one of the nexus protections for state income and franchise taxes is P.L. 86-272, but it does not apply to any non-income taxes. Accordingly, an entity with employees engaged only in the solicitation of tangible personal property within a state, which is otherwise protected from income tax nexus under P.L. 86-272, may still be subject to a state’s sales and use tax and other non-income tax based taxes (that is, franchise taxes based on net worth).
Once a company has nexus for sales and use taxes, that company is required to register with the state's tax department and file sales tax returns. Depending on the volume of sales, the company may be required to file returns on an annual, quarterly, or monthly basis. Generally, sales tax is imposed on retail sales, leases, rentals, barters, or exchanges of tangible personal property and certain enumerated services unless specifically exempted or excluded from tax. Sales tax generally is imposed in the jurisdiction in which the sale occurs. The definition of sale differs from jurisdiction to jurisdiction; however, the definition generally includes both: (1) consideration; and (2) transfer of title, right to use, or control (possession) in the case of tangible property and completion of the service act in the case of a service. All retail sales of tangible personal property are presumed to be taxable sales unless the contrary is established. When tangible personal property is sold, and the purchaser intends to resell the property, the sale is not a retail sale; rather, it is a sale for resale. A resale exemption is allowed because the intermediate sale does not represent the ultimate sale or final consumption sale of the tangible personal property. The burden of proving that a sale is not a sale at retail is on the seller unless an exemption applies. For example, the collection of a resale certification from purchasers generally supports the position that the sale is an exempt sale for resale.
Joel Walters, based in Washington, DC, is PwC's US Inbound tax leader. Maureen Pechacek, based in Minneapolis, and Todd Roberts, based in Denver, are partners in the firm's State and Local Tax practice. The authors give special thanks to Michael Santoro.
This is the fourth in a series of articles looking at multistate US tax issues facing inbound companies. Part I looked at instances and activities that could subject a foreign entity to state tax. Part II explored the issues surrounding multistate apportionment. Part III addressed issues surrounding filing methodologies and the treatment of foreign source income.