16 March

Multi-State and International Tax Planning

When taxes on a corporation are paid in one jurisdiction, very often part or all of that tax paid may be taken as a deduction, in other words, reduce taxes that may be due in another jurisdiction. For example, state income taxes paid may be deductible from the amount of income tax that is due to the Federal government or the IRS.

How to Handle Multi-State Taxes

State tax regulations, statutes, administrative rules and court decisions are continually changing. When a corporation is conducting business in more than one state, often the business is subject to all the tax levies imposed by both states. The greater the number of states in which a corporation operates, the more complex multi-jurisdictional and cross-jurisdictional tax issues become. Some of these multi-jurisdictional tax types are income, franchise, corporate, sales, use, and all of the different associated credits, exemptions and incentives pertaining to each jurisdiction. Each of these taxes and exemptions can change frequently and significantly within a given jurisdiction, and they typically differ from state to state.

For example, the State of Nevada does not levy any corporate or individual income taxes. Alternatively, in states such as California, they not only levy corporate and individual taxes, but also levy other types of taxes, such as the Franchise tax.

Also relevant to multi-state and international tax planning are location of income earned, annual income size, and sources of income: the importance and relevance of these also vary by State.

Sales and Use taxes may also have county or municipal components, meaning that the sales tax in one city or county may differ from other cities in that county or state. As a result of these variations, a tax paid in one state or jurisdiction may or may not be deductible from taxes due in another state or jurisdiction.

How to Handle International Taxes

Similarly, part or all of an income tax paid to another country on income earned in that country may be deducted from the income tax due to the IRS when those profits are brought back to the U.S. (often called “repatriated” profits).

Some countries levy taxes that may be higher, or lower, or even non-existent in the United States.

For example, each country in the European Union has a Value Added Tax (VAT), which is very similar to a national sales tax on all goods and services. The U.S. does not have a nationwide sales tax, sales taxes are instituted at the state level and vary widely between states. Some states such as Oregon, New Hampshire, Delaware, Montana, and Alaska do not even have a sales tax. Some states have both a state sales tax and county or municipality sales taxes.

The Changing Laws of Multi-State and International Tax

Most states levy a state corporate tax, but a few states including Nevada, Texas and Wyoming do not assess any corporate income taxes. Sales taxes or Value Added Taxes paid in one jurisdiction are not generally deductible in another jurisdiction. Many other laws and regulations vary between jurisdictions, which govern the payment and reporting of taxes paid by corporations.

More recently with the increasing dollar volume of cross-jurisdictional sales made via the Internet, many states are attempting to collect sales taxes for their state on sales made to residents of a different state. In the past, this did not occur with “brick and mortar” sales, or with low-volume mail order sales. However, because of the high growth of sales volume made across state lines via the Internet, and shrinking state budgets, many states are looking to increase their tax revenues by changing their sales tax laws and rules to collect taxes in ways that did not previously exist. This is just one new example of how critically important it is for a business owner to engage the services of a tax planning professional, who constantly monitors these changes, as part of the Corporation Formation and Tax Planning processes.