Inbound U.S. Tax Services

"BROOKS NELSON: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters. Today we're talking about certain U.S. tax systems and how they may be similar or may differ from those of another country.

BROOKS NELSON: International companies are introducing their goods and services into the U.S. market, expanding operations, and investing in capital and production. For companies that are new to the U.S. or have been here for a while, it is valuable to get a picture of the tax compliance rules that can frustrate even the most experienced U.S. company.

BROOKS NELSON: Joining today's conversation is Lauren Stinson, partner, leader of our firm's U.S. tax practice, and Brian Dill, partner and leader of our firm's International Tax Services team. Hello, Lauren, how are you doing today?

LAUREN STINSON: I'm good, Brooks. All right.

BROOKS NELSON: This is a very apropos discussion. You're leaving for India when and for how long?

LAUREN STINSON: I'm leaving at the end of the week for three weeks. Very excited to talk to all sorts of different Indian companies about doing business in the U.S. and all their sales tax obligations.

BROOKS NELSON: Brian, how are you doing today?

BRIAN DILL: Great, Brooks. Good to be here. I'm sitting in Atlanta. I'm here in the States.

BROOKS NELSON: And not in India for three weeks.

BRIAN DILL: Not for three weeks.

BROOKS NELSON: As always joining me is Sarah McGregor from our Greenville office. How's life treating you, Ms. McGregor?

SARAH MCGREGOR: Life is good. I'm not an app yet, but if AI keeps going maybe I'll become an app someday.

BROOKS NELSON: We should be getting excited. We're getting close to our March 15 deadline, which means we're getting close to having the March 15 deadline behind us. I'm Brooks Nelson, sitting here in Richmond today. It's a kind of jury day in Richmond, but not too cold at least.

BROOKS NELSON: For a little background, an international company making a step, small or large, into the U.S. market has a few key tax systems to learn and adapt to. First among these is U.S. sales tax.

BROOKS NELSON: Many other countries offer their version of sales tax, be it a value-added tax (VAT) or, for example in India, a goods and services tax, also called GST. U.S. sales tax is very different in who pays, who collects, and at what point in the economic transaction.

BROOKS NELSON: International businesses and U.S. businesses find it challenging to understand where, when, and how all these issues with sales tax apply, not to mention the systems for doing so. Foreign tax compliance rules offer similar challenges regarding withholding and payments and income to foreign owners.

BROOKS NELSON: Unfortunately, these jurisdictions don't want to get together and do it one way, and the pros and cons, winners and losers of each system leave taxpayers in need of expert tax advice and services that we provide. We'll start with Lauren on sales and use tax. Give us an overview of the key differences between VAT or GST and U.S. sales tax in 30 words or less, please.

LAUREN STINSON: One of the biggest differences is the taxation structure. In a VAT or GST regime, tax is collected along the supply chain by businesses and netted on the return, so everyone pays and credits what they paid.

LAUREN STINSON: With U.S. sales tax, resale exemptions or resale certificates are used by buyers in the supply chain, and only the final consumer pays tax at the end. In both cases the burden falls on the end user, but the mechanism is very different.

LAUREN STINSON: Another big difference revolves around rates and jurisdictions. In VAT and GST systems there are typically just a few uniform rates, whereas in the U.S. there are over 13,000 different jurisdictions, each with its own rates.

BROOKS NELSON: How does actual compliance—paying and reporting—differ between VAT/GST and U.S. sales tax?

LAUREN STINSON: It really boils down to nexus and taxability. In the U.S., sales tax is based on those concepts: where you have nexus and whether you're selling taxable goods or services. That combination determines where sales tax needs to be collected.

LAUREN STINSON: For foreign businesses, every location in the U.S. can have a different rate. The U.S. has over 13,000 sales tax rates across the country, while most other countries keep it simpler with one or a few rates.

BROOKS NELSON: Let's revisit those themes—first, taxability. What gets taxed?

LAUREN STINSON: Generally, across states, most sales of tangible personal property are taxed. Some states tax a fair number of services, but that varies widely. You have taxability of products and services, and it depends on the nature of the service.

BROOKS NELSON: How does a company know when it has to start collecting sales tax? What are the triggers?

LAUREN STINSON: That million-dollar question comes down to a nexus footprint—where you have a connection to a state. Physical presence creates nexus, such as employees, sales reps, offices, or inventory. It can even include subcontractors or 1099 employees.

LAUREN STINSON: There's also economic nexus, meaning you're selling enough into the state. Each state defines ""enough"" differently. A good rule of thumb is that economic nexus is often triggered by about $100,000 of sales into a state, but it varies.

LAUREN STINSON: Either physical nexus or economic nexus can create sales tax obligations if what you're selling is subject to tax.

BROOKS NELSON: Brian, thinking about those same rules—economic activity in a state or physical presence—do those rules cause a company to be subject to federal income tax and federal reporting?

BRIAN DILL: No. We wouldn't be having this conversation if they were the same. Physical presence creates overlap, so if you have inventory in a state, own a building, or have employees, you should evaluate federal reporting and liability. But economic nexus differs federally.

BRIAN DILL: On the federal side we have source rules, which were expanded by cases like Wayfair and others. There are situations where the use of intangible property inside a state can create nexus-type effects. From a withholding perspective, the source of income may be U.S. source, but the person paying it may have the withholding responsibility.

BRIAN DILL: The Wayfair concept expanded economic nexus for sales taxes, but from a federal perspective we generally have not gone that far to say selling into the U.S. alone creates federal reporting or tax liability. A company selling into the U.S. from abroad might be required to collect sales tax but not necessarily have federal income tax liability.

SARAH MCGREGOR: I would add you need to be careful in the federal context about your legal contracts. In e-commerce, people might say they're using a platform like Amazon and have no presence, but inventory can be held in the U.S. on consignment, and the foreign person may still own that inventory here.

SARAH MCGREGOR: For foreign companies without a treaty with the U.S., that could rise to the level of a U.S. trade or business in physical presence.

BROOKS NELSON: We have March 15 looming. That's an important deadline for many things in our tax system, including paying certain withholding taxes. What should international companies know or do regarding a March 15 potential deadline for withholding taxes?

BRIAN DILL: If there was U.S. source income and withholding, recipients should be receiving Form 1042-S and should evaluate those forms to see if they were overwithheld and may have a refund opportunity.

BRIAN DILL: For withholding agents, the time to pay has likely already passed. Withholding taxes generally need to be paid within a short time of the payment, and Form 1042 usually must be filed by March 15. Extensions are limited—there is a 30-day extension available for filing, not the usual six-month extension.

BRIAN DILL: This filing is a summary of payments and withholding made over the year; it's not where a company initiates withholding and payment. If payments were missed, get payments in immediately and mitigate penalties and interest where possible.

LAUREN STINSON: I did see that the IRS has delayed the requirement for electronic filing of these forms for this year and will allow paper filing, but electronic filing will be a hard requirement coming soon.

BROOKS NELSON: For U.S. subsidiaries or branches of foreign parents or foreign owners, what should accounting or tax teams be discussing with those owners now in early 2024?

BRIAN DILL: A few things: evaluate overhead allocations, what costs will be borne by the U.S. company, and make sure intercompany pricing is documented. For branches, remittances can be handled loosely—money taken back to the foreign parent might be characterized as a loan, dividend, or something else. Documentation matters.

BRIAN DILL: If it was a dividend, were withholding taxes paid? These transactions can be sloppy because everyone assumes it's all internal. They need to be classified and documented correctly.

SARAH MCGREGOR: Any payments crossing a border require attention. In my area, intercompany accounts often cause financial statement restatements. Companies book intercompany transactions and create a spiderweb that's hard to unravel if books aren't closed monthly or quarterly.

BROOKS NELSON: Lauren, you mentioned 13,000 jurisdictions for sales and use tax. Are there technology or outsourcing solutions to help companies with this?

LAUREN STINSON: Absolutely. There are too many rates and taxability rules to handle manually anymore. Tax engines can bolt onto a billing system, accounting system, or an online shopping cart. When a customer enters an address, the tax automation engine can check product tax codes and the correct rate for that address and return the appropriate sales tax.

LAUREN STINSON: For compliance, there are outsourced providers—Cherry Bekaert is one—where we handle filings, notices, and ensure the tax technology is working correctly to get the right rates and file returns accurately and on time.

BROOKS NELSON: Brian, thoughts on automation, technology, and outsourcing tax solutions?

BRIAN DILL: When dealing with cross-border setups, configure your ERP systems correctly and get advisors who know how to set them up. We often see U.S. branches and foreign parents in the same company file under the same ERP legal entity when they should be separate. That separation helps track intercompany accounts.

BRIAN DILL: For intercompany pricing, use digital tools to support transfer pricing compliance. Digital solutions can help comply with various jurisdictions.

BROOKS NELSON: Final comments. Lauren, you have the floor first.

LAUREN STINSON: Sales tax is very complicated. Companies should remember it shouldn't be a tax their company bears. If you have obligations to collect and file sales tax, you should be collecting it from customers and remitting it to the state.

LAUREN STINSON: If you aren't doing it correctly, you can go from being a tax collector to being a taxpayer, meaning you may have to pay tax out of your own pockets to the state. Understand your obligations, the taxability of your products and services, set up tax technology or processes to ensure you're collecting correctly, and consider an outsource solution to file returns.

BRIAN DILL: Anytime a company is looking at expanding into the U.S. market, realize you have multiple layers to evaluate. You have state sales and use tax for all 50 states and the localities and sublocalities, each with independent rules. You also have state income tax, federal rules about whether you have a taxable presence, and treaty considerations.

BRIAN DILL: These evaluations should be done upfront rather than after you've been here a year and discover you need to file returns. Acting early allows you to take full advantage of opportunities.

SARAH MCGREGOR: Both Brian and Lauren have outlined that handling these items correctly at setup and giving them attention early will make compliance less burdensome. Coming in late and trying to clean up puts you on the back foot while you're trying to grow the business.

SARAH MCGREGOR: Governments are becoming more assertive about collecting taxes as jurisdictions seek budget dollars. If you're on top of it, compliance can be relatively painless; if you fall behind, it becomes problematic, especially with withholding tax scenarios where penalties can be excessive. It's in your best interest to consult proper advisors when entering the U.S. market.

BROOKS NELSON: That's a wrap on today's discussion on tax reporting complexities for international companies starting to do business in the U.S. A quick disclaimer: we are not providing tax advice on this podcast. Please consult with your tax advisor, hopefully at Cherry Bekaert, for your specific tax issues or to discuss information from today's podcast.

BROOKS NELSON: Check the firm's website at cb.com for the latest guidance and materials on this and other tax and business topics. Please like, share, and subscribe. Thank you, Lauren. Thank you, Brian. Thank you to our listeners for spending your time with us. Let's call it a day. Peace."