• The party responsible for paying the tariff determines if the charge is included in the taxable sales price under state sales and use tax rules. 

• Sales tax treatment of tariffs varies by state, making it essential for businesses to stay updated on local laws to remain compliant and avoid penalties. 

• Businesses can reduce sales tax exposure by strategically structuring transactions to exclude tariff costs when legally allowed by state tax guidance. 

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Tariffs are not new, but dramatic increases in their rates have drawn attention to them.  

To mitigate the effects of those levies, some businesses have chosen to separately state tariff-related surcharges on their invoices, raising questions about whether such separately stated charges are subject to sales tax. 

While the inclusion of tariffs in the sales tax base varies across states, a common consideration is which party bears responsibility for the tariff. If the seller is the importer and passes the tariff cost to the consumer, that cost generally is included in the taxable sales price; however, if the purchaser is responsible, the tariff often is not included. Although many states have yet to provide specific guidance on this topic, some have addressed it.  

Consider some illustrative guidance from South Carolina and New Jersey. 

In 2020, South Carolina specified in Rev. Rul. 20-4 that for sales and use tax purposes, when the purchaser is the importer and therefore personally liable for the tariff, the cost of the tariff is not included in the gross proceeds of sales or the sales price. That is because the purchase of the item and the purchaser’s payment of the tariff are two separate transactions.¹ The purchaser’s sales and use tax is based only on the gross proceeds of sales or the sales price of the transaction with the seller. It does not include the cost of the tariff the purchaser pays to the federal government. 

If someone other than the purchaser is responsible for the tariff (such as when the seller is the importer and any or all of the cost of the tariff is recovered from the purchaser), the charge is includable in the gross proceeds of sales or the sales price. It also is subject to sales and use tax unless the retail sale of the tangible personal property is otherwise exempt. 

In May, New Jersey published guidance on the sales tax treatment of tariff markups. The guidance states that if a seller passes tariff costs to the consumer, the charges are subject to sales tax as part of the taxable sales price, even if the purchase invoice separately states the tariff. To illustrate that concept, the guidance offers the following example: 

If the U.S. government imposes a tariff on furniture imported from another country, that tariff is passed along to the furniture seller. A seller may increase the sales price of the furniture sold to customers to maintain its profit margins. If the seller marks up the price of the furniture, even if it is billed as a separately stated fee, the increased cost and/or fee is subject to Sales Tax since it is part of the taxable sales price. 

Understanding the impact of sales tax and tariffs across states requires careful consideration of which party bears the responsibility for the tariff and how that is reflected in the taxable sales price. The variability in state regulations means businesses must stay informed about local tax laws to help ensure compliance and refine their financial strategies. As demonstrated by the examples from South Carolina and New Jersey, whether the seller or purchaser is responsible for the tariff can significantly affect the tax implications.  

Insight 

For companies and consumers alike, evaluating the benefits of being the importer of record for large purchases could offer tax advantages by excluding tariff costs from the taxable base. Ultimately, navigating the complexities of sales tax and tariffs demands a proactive approach to understanding state-specific guidelines and leveraging them to mitigate financial effects.  

Written by Steven C. Thompson and Gregory Devlin. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

Navigating Sales Tax and Multistate Challenges with Confidence 

At MGO, we help businesses manage the complexities of sales tax, tariffs, and multistate compliance through tailored guidance and strategic planning. Our State and Local Tax (SALT) professionals work across industries like manufacturing, retail, and technology to address shifting regulations, reduce risk, and improve tax efficiency. Backed by deep technical experience and real-world insight, we support organizations in making informed decisions that align with their growth and compliance goals. Contact us to learn more.  

The post Sales Tax and Tariffs: Understanding the Impact Across States  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Louisiana adopted a 5.5% flat corporate income tax rate and a 3% flat individual income tax rate, replacing graduated rates.

• The corporate franchise tax will be repealed starting in 2026.

• The sales and use tax rate increased to 5% in 2025, with new rules clarifying taxation and exemptions for digital products, software, and services.

• Businesses and individuals can claim bonus depreciation and amortization deductions, but several tax credits will sunset in 2025. Voters will decide on further tax reforms in a March 2025 election.

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Louisiana Voters Reject Constitutional Amendments

On March 29th, the voters in Louisiana rejected changes to their state constitution. Amendment Number 2, related to the overhaul of Article VII: Revenue and Finance of the constitution, was opposed by 65% of voters. The 115 page amendment included the following revisions: requiring a two-thirds majority vote of the legislature to enact a tax exemption, exclusion, deduction, credit or rebate, or an increase in the amount of a tax deduction, credit or rebate; replacing of the graduated individual income tax rate with a flat rate of 3.75%; providing individuals who are 65 year old or older with an additional standard deduction equal to the amount applicable for a single individua;, and removing the minimum tax rate for Cigarette Taxes. In the wake of this defeat, some lawmakers are discussing revising the failed Amendment 2 and presenting it for another vote, while Governor Jeff Landry issued an executive order on April 2nd calling for a hiring freeze to save millions in state general funds this year.

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After completion of a special legislative session focused on tax reform initiated by Louisiana Governor Jeff Landry, he signed multiple tax bills leading to significant reforms in corporate franchise tax, corporate income tax, personal income tax, and sales tax. Governor Landry predicts these tax changes will make Louisiana more attractive to businesses and enable Louisianans to keep more of their income.

Corporate Franchise Tax

Corporate Franchise Tax is repealed for taxable periods beginning on or after January 1, 2026.

Corporate Income Tax

The graduated corporate tax rate was eliminated and a flat rate of 5.5% was imposed beginning January 1, 2025. The law also provides for a $20,000 corporate standard deduction, which corporations can deduct from their federal gross income. Corporate taxpayers can elect to immediately expense the cost of qualified property, qualified improvement property, and research and experimental expenditures in the tax year in which the property is placed in service, or the expenditure is paid or incurred.

Individual Income Tax

Similarly, the graduated rates for individual income tax were replaced with a flat 3% rate beginning January 1, 2025. The standard deduction for single individuals and taxpayers who are married and filing separately increased from $4,500 to $12,500. The standard deduction for those married and filing jointly or a qualified surviving spouse and head of household increased to $25,000. The standard deduction will be adjusted for annual inflation starting in 2026.

The annual retirement income exemption was increased from $6,000 to $12,000 and will be adjusted annually.

The graduated rates for pass-through entities that elect to be taxed as a corporation were repealed and the flat 3% individual income tax rate will apply beginning January 1, 2025. In addition, the income of an estate or trust will be taxed at 3%.

Individuals, S corporations and other pass-through entities, and trusts and estates will be permitted to take a bonus depreciation deduction and bonus amortization for research and experimental expenditures, similar to those permitted by corporations.

Sales and Use Tax

The sales and use tax (SUT) rate was increased to 5% effective January 1, 2025 — accomplished by imposing an additional levy of 0.55% and making permanent the temporary increase of 0.45%. The combined SUT rate will reduce to 4.75% effective January 1, 2030. The law also updated the definition of “sales price” to include delivery and transportation charges in the sales tax base.

The new law formalized the definition of “digital products” and provided clarification on the taxability and exemption of various digital products for the taxable periods beginning on or after January 1, 2025. Previously, the Louisiana statutes did not reference “digital products.” However, citing precedent from the Louisiana Supreme Court, the taxing authority provided administrative guidance that digital products were taxable tangible personal property.

The new legislation provides digital audiovisual works, digital audio works, digital books, digital codes, digital application and games, and digital periodicals and discussion forums are subject to SUT. Computer software, prewritten computer software access services, and information services are exempt from SUT provided these products are (1) purchased exclusively for commercial purposes, (2) used directly in the production of goods and services for sale to customers, and (3) the goods or services produced and sold are subject to SUT or insurance premium tax.

Licensed healthcare facilities and FDIC-insured financial institutions using digital products for storing or transmitting information are exempt from SUT. The new law eliminated the definition of “custom software” and subjects all software to SUT.

Recently, the Louisiana Department of Revenue clarified that certain exemptions of the SUT would continue to be recognized despite being repealed by the new legislation. These exemptions include certain sales by nonprofit organizations and admissions to athletic or entertainment events of educational institutions.

The vendor’s compensation, which is allowed if the SUT return is filed and paid on time, was reduced to a maximum monthly amount of $750 from $1,500.

Miscellaneous Taxes

The law established a sunset of June 30, 2025, for multiple incentive programs, including Louisiana Work Opportunity Tax Credit, Louisiana Quality Jobs Program, Angel Investor Tax Credit Program, Sound Recording Investor Tax Credit, and Enterprise Zone program. New applications for these credits cannot be submitted after the sunset date.

Constitutional Amendment

In addition, several tax changes require approval by the voters through a statewide election which will be held on March 29, 2025. Louisianans are being asked to vote for a state constitutional amendment modifying the income tax, property tax, severance tax, cigarette tax, motor vehicle license tax, and the power to tax. Specifically, the amendment would make the following changes:

1. Reduce further the individual income tax rate.

2. Increase the standard deduction for senior citizens.

3. Amend provisions for property tax.

4. Repeal the authorization and prohibition for levy of severance taxes.

5. Abolish the minimum rate for cigarette tax.

6. Change the authority, requirement and restrictions involving motor vehicles license tax.

How MGO Can Help

Decreases in the tax base created by an appreciative reduction in the corporate and individual income tax rates, repeal of the corporate franchise tax, and increase in the standard deduction are offset by the increase in combined sales and use tax rate and enlarging the sales tax base to include numerous services. These extensive changes will have a significant impact on businesses and individuals.

More guidance and clarifications are expected from the state to assist taxpayers in properly applying these modifications. We can help you evaluate these changes, take advantage of the new tax benefits, and assist in compliance with the expanded tax obligations. Reach out to our State and Local Tax team today to learn more.

The post Louisiana Enacts Significant Tax Changes appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Buyers will scrutinize tax compliance during the due diligence process.
• Failing to address potential underpayments or nexus issues can lead to purchase price adjustments, indemnifications, or even deal cancellations.
• A proactive tax nexus analysis can spot potential issues early and protect your business valuation.

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Preparing a manufacturing business for sale is a complex process. It can be so complex that around 10% of all announced transactions are canceled, according to an analysis from McKinsey.

When preparing your manufacturing business for sale, one way to help the deal go through is to conduct a tax nexus exercise. This process identifies your business’s income and sales tax obligations and addresses potential underpayments before a buyer performs due diligence. Taking a proactive approach to state and local tax exposures can be the difference between a seamless sale and a derailed deal.

Understanding Nexus in the Manufacturing Industry

Nexus refers to the connection between your business and a state that obligates you to collect and remit sales tax or pay income taxes. You can create nexus through physical presence (such as employees, offices, or warehouses in a state) or economic activity (based on thresholds like sales volume or number of transactions).

The landscape of sales tax nexus has grown increasingly complex since the 2018 Supreme Court decision in South Dakota v. Wayfair, which expanded states’ authority to enforce economic nexus laws for sales tax collection.

Why Nexus Matters in a Sale

Buyers who evaluate a business scrutinize tax compliance as part of the due diligence process. If a manufacturer has failed to address nexus obligations, the buyer may:

• Adjust the purchase price to account for potential tax liabilities.
• Hold back funds in escrow until you resolve the exposure.
• Demand indemnification, placing the financial burden of future tax disputes on the seller.

Common Pitfalls for Manufacturers

Manufacturers face unique challenges in managing tax compliance. Below are some common pitfalls and tips for avoiding them:

Failing to Collect Resale Certificates

Many manufacturers sell at wholesale and rely on resale certificates to exempt transactions from sales tax. However, failing to keep certificates current or collect them from all customers can lead to significant exposure.

For example, one of our clients, a manufacturer of high-end doors, unknowingly triggered nexus in multiple states through their installation activities. When the business was up for sale, buyers uncovered an estimated $5 million in uncollected sales taxes.

Fortunately, after analyzing their prior accountant’s workpapers, we realized the manufacturer had not collected resale certificates from many of their customers. By collecting those certificates, we reduced the estimated liability to $300,000, salvaging the deal without significant price adjustments.

Underestimating Economic Nexus Thresholds

States vary widely in their economic nexus thresholds, with some as low as $100,000 in sales. Manufacturers with high transaction volumes or multi-state operations may unknowingly exceed these limits.

For this reason, you must have mechanisms in place to monitor sales volume in each state where you make sales. Many states have a short turnaround time in which they expect you to register once you exceed the economic threshold.

Overlooking Corporate Employee Activity

Having employees work in a state, even temporarily, can create nexus. For example, employees working remotely from another state or sending clients across state lines for installations or inspections may trigger physical nexus.

Determine where all employees, especially remote workers, live and work to assess potential nexus implications.

Assuming Public Law 86-272 Provides Protection

Historically, manufacturers relied on Public Law 86-272 (P.L. 86-272), which exempted businesses from income tax if their activities were limited to soliciting orders for tangible personal property shipped from outside the state.

In 2021, the Multistate Tax Commission, an intergovernmental agency dedicated to ensuring fair and consistent tax policy among states and localities, updated its interpretation of P.L. 86-272, concluding that most internet-based sales fall outside its protections.

If your business relies on P.L. 86-272 to shield transactions from state income taxes, it’s crucial to analyze what specific economic, physical, or digital activities occur in each state and address them before putting the business up for sale.

How MGO Can Help

If you are preparing to sell your business, conducting a tax nexus exercise isn’t just “nice to have” — it’s an essential part of preparing the business for sale.

Considering nexus compliance upfront protects the business’s valuation, streamlines the sale process, and addresses financial risks for both seller and buyer. If your current accounting firm lacks this capability, ask them to team up with a firm that has a state and local tax-focused niche.

Proactively addressing state tax compliance with the help of an experienced team like MGO’s State and Local Tax group can help your deal close smoothly and profitably.

The post Selling Your Manufacturing Business? Consider Sales Tax Nexus appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Key Takeaways:

• Early tax planning is crucial to avoid costly mistakes and improve your U.S. market entry.
• Carefully evaluate entity structure, supply chain, and transfer pricing strategies.
• Engage with experienced legal and tax professionals to guide your U.S. expansion.

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Foreign direct investment (FDI) in the United States continues to grow, underscoring the country’s appeal to global businesses. However, this influx of investment also highlights the critical need for thorough pre-arrival tax planning. Proper planning is essential for navigating the complexities of the U.S. tax landscape and achieving a smooth and successful entry into the U.S. market.

Importance of Planning Before Entering the U.S. Market

The growing interest in the U.S. market among international investors makes it even more crucial for businesses to engage in comprehensive tax planning before entry. The U.S. tax system is multifaceted, with multiple layers of federal, state, and local taxes — each with its own set of regulations.

For foreign businesses, understanding these complexities early on is vital for mitigating tax liabilities and keeping compliance. Without a robust pre-arrival tax strategy, your company may face unexpected tax burdens, penalties, and operational challenges that could hinder your success in the U.S.

Checklist for Pre-Arrival Planning

Before entering the U.S. market, your business should follow a comprehensive checklist that addresses critical tax and operational considerations. Here are some of the key steps:

Decide the Appropriate Entity Structure

• C corporation or LLC (limited liability company): Given the ongoing growth in FDI, selecting the right business entity is crucial to capitalizing on the favorable investment climate in the U.S. A C corporation may be beneficial for companies looking to raise capital through equity, while an LLC offers flexibility and potential tax advantages.

• Branch, subsidiary, or no taxable presence: Foreign businesses must decide whether to operate as a branch of the parent company or set up a subsidiary in the U.S. Each choice has different tax implications and operational challenges. Another option, if planned appropriately, could be to sell in the U.S. without creating a taxable presence. This can be achieved by conducting limited activities or relying on a U.S. income tax treaty to avoid creating a permanent establishment in the U.S.

• Joint venture or partnership: Some foreign businesses choose to partner with an existing American company to more quickly pierce the market. This option can provide a more systematic and flexible path to U.S. market entry.

Analyze Supply Chain Implications

• Customs duties and tariffs: Understand the impact of U.S. customs duties and tariffs on imported goods. Proper supply chain planning can help minimize costs and avoid delays.

• Logistics and distribution: Evaluate the most efficient logistics and distribution channels for your products in the U.S., considering factors such as warehousing, shipping costs, and regional demand. With FDI driving increased competition, improving your supply chain can provide a critical advantage.

Develop a Transfer Pricing Strategy

• Compliance with Internal Revenue Service (IRS) guidelines: Price intercompany transactions according to arm’s length principles to follow IRS transfer pricing regulations. This is especially important for businesses with significant cross-border and/or cross-state transactions.

• Documentation requirements: Keep thorough documentation of transfer pricing policies and transactions to avoid penalties during an IRS audit.

Understand State and Local Tax Obligations

• Nexus considerations: Determine where your business has nexus for sales and use tax, income/franchise tax and other tax — whether through physical presence, economic activity, or other factors — since this will dictate your state and local tax filing obligations.

• Sales tax compliance: Register for sales tax collection in jurisdictions where your business has nexus and follow state-specific sales tax regulations.

Address Benefits and Payroll Requirements

• Health insurance and retirement plans: Understand U.S. regulations on employee benefits, including health insurance and retirement plans, which may differ significantly from those in other countries.

• Payroll taxes: Prepare for U.S. payroll tax obligations, including Social Security, Medicare, and federal and state unemployment taxes.

Engaging with Legal and Tax Professionals

Working with experienced legal and tax professionals is critical to successfully navigating the complexities of the U.S. tax system. These professionals can provide you tailored advice based on your specific business needs, helping you avoid common pitfalls and improve your tax strategy.

How to Choose the Right Advisors

• Experience and knowledge: Look for advisors experienced in U.S. tax law, particularly those specializing in international and state and local tax issues who have a deep understanding of the industries in which you operate.

• Proven track record: Seek out professionals with a proven track record of helping foreign businesses successfully enter the U.S. market. Client testimonials and case studies can be valuable indicators of their capabilities.

• Collaborative approach: Choose advisors who will work closely with your in-house team and your other consultants to develop a cohesive strategy that addresses all aspects of your U.S. market entry.

Position Your Business for a Seamless U.S. Market Entry

With the U.S. continuing to attract significant FDI, your business must be well-prepared to enter the market. Pre-arrival tax planning is key. By carefully considering entity structure, supply chain logistics, transfer pricing, and state and local tax obligations, you can position your business for long-term success in the U.S.

How MGO Can Help

Entering the U.S. market can be complex, but you don’t have to navigate it alone. Our assurance, tax, and consulting professionals — including International Tax and State and Local Tax teams — are here to guide you through every step of the process.

Reach out to our team today to learn how we can help your business plan strategically to achieve a smooth U.S. market entry.

The post Your U.S. Market Entry Pre-Arrival Tax Planning Checklist appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Key Takeaways:

• Understand economic nexus to avoid unexpected tax liabilities when expanding your business into the United States.
• State-specific sales tax rules vary widely; compliance avoids penalties and streamlines operations.
• Consulting with tax professionals can help you navigate complex state and local taxes, enhancing your U.S. expansion strategy.

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The U.S. continues to captivate global businesses, attracting significant foreign direct investment (FDI). It’s easy to understand why: Entering the U.S. market is a strategic move that gives your business access to a vast customer base and a thriving economy. However, this opportunity also comes with the challenge of navigating a complex tax landscape. Understanding the nuances of state and local taxes is crucial to maintaining compliance while refining your U.S. operations.

This article explores critical aspects of state and local tax issues — focusing on economic nexus, sales tax obligations, and the importance of consulting services in navigating these challenges.

Overview of State and Local Tax Complexities

The U.S. tax system is uniquely intricate, with businesses required to navigate not only federal taxes but also the varying tax rules of 50 states and many localities. As a strong influx of FDI drives more companies to establish operations in the U.S., many of these businesses find themselves unprepared for this complex tax environment. Companies must stay compliant across multiple jurisdictions — a challenge that can significantly impact your overall tax burden.

Consider a European company expanding its e-commerce operations into the U.S. The company quickly discovered that a lack of understanding of state-specific sales tax obligations led to non-compliance, resulting in costly penalties and accumulating interest. By consulting with tax professionals, the business streamlined its tax compliance processes and reduced its overall tax liability — highlighting the importance of professional guidance.

Economic Nexus

Definition and Implications of Economic Nexus

Economic nexus refers to a business’s economic activity within a state, which may create a tax obligation regardless of physical presence. This concept gained prominence following the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., which allowed states to require businesses with significant economic activity in a state to collect and remit sales tax (even if the company has no physical presence in the jurisdiction). Since the Wayfair decision, an increasing number of states are applying economic nexus for both sales and use taxes as well as state income taxes through the use of a factor presence nexus standard.

State-by-State Nexus Thresholds

It is crucial to understand each state’s threshold for economic nexus. It’s also important to understand that the economic nexus threshold for sales and use tax may not be the same as the threshold for income tax. For example, in New York, a business with more than $500,000 in sales and 100 transactions within the state must collect and remit sales tax. However, a corporation is not subject to New York corporate income/franchise tax unless its New York receipts equal or exceed $1,000,000. Other states may have higher or lower economic thresholds. Keeping track of these varying standards is essential for proper compliance.

Impact of Legislation

Changes in state and local tax laws, such as those resulting from the Wayfair decision, have far reaching implications for businesses — especially in e-commerce. Your company must continually monitor changes in state tax laws to remain compliant and avoid unexpected tax liabilities.

Sales Tax Obligations

Sales tax requirements in the U.S. are state-specific, with each state setting its own rates, rules, and exemptions. This can be particularly challenging if your company operates in multiple states, as you must manage varying tax obligations depending on the jurisdictions where you conduct business. For instance, while a good or service may be subject to sales tax in some states, it may be exempt in others.

Examples of Compliance Challenges

Compliance with state-specific sales tax rules can be complex and time-consuming. For instance, a company might face challenges in categorizing products or services as taxable or nontaxable according to each state’s tax code. Additionally, managing exemption certificates, state and local tax rates, filing deadlines, and keeping up with ever-changing tax laws can create significant administrative burdens.

Industry Specific Considerations

The sales tax challenges facing businesses vary from industry to industry. For example, an e-commerce company selling software-as-a-service (SaaS) may find its revenue is subject to sales tax in some states while not in others. To properly address the issue, the company should understand how the various states source their revenue. Then the company should review those identified states’ laws to determine how they define taxable products and services. Finally, the company needs to understand how each state applies similar laws in their own unique manner. Understanding these nuances is critical for correct tax collection and reporting.

Consulting Services 

Role of Consulting in Navigating State and Local Taxes

Given the complexities of state and local tax laws, consulting with tax professionals is crucial. They can help your business understand its tax obligations, develop strategies to minimize your tax burden, and verify you are compliant with evolving state and local tax rules and regulations.

Consulting Strategies for Compliance

• Nexus studies: Consultants can conduct nexus studies to determine where a business has tax obligations, helping you avoid potential penalties for non-compliance.
• Automation tools: Consultants can assist you with implementing tax automation software to streamline the process of calculating, collecting, and remitting sales tax across multiple states.
• Audit representation: Consultants can aid with state tax audits by helping to prepare all necessary documentation, confirm the company is fully compliant with tax laws, communicate directly with the auditor, and provide nuanced arguments regarding tax positions taken.

Tax Credits and Incentives

Consultants can help businesses take advantage of state-specific tax credits and incentives, which could be a deciding factor for where to set up a new facility. For example, states like California offer significant credits for research and development (R&D) activities. Your business should conduct a comparative analysis of the tax incentives offered by different states. A state currently receiving high levels of FDI may offer significant tax credits for R&D activities or job creation, which could be critical for manufacturing companies deciding where to locate their operations. These incentives are often part of state-level strategies to attract more foreign businesses.

Emerging Trends and Future Considerations

Changes in State Tax Policy

One emerging trend is the increasing reliance on sales tax by states due to declining income tax revenues — a shift that may be partially influenced by broader economic trends, including strong FDI inflows into the U.S. Your business can prepare for these changes by staying informed about legislative updates and adjusting your tax strategies accordingly. A state and local tax consultant can play an instrumental role in assisting your company in keeping up with these trends.

Impact of Remote Work

Since COVID, the rise of remote work has further complicated state tax obligations. Companies with remote employees in multiple states may face new tax liabilities even if the business has no other physical presence (like an office). Additionally, as remote work becomes more prevalent, the tax obligations for companies with employees in multiple jurisdictions are becoming increasingly complex, further underscoring the need for proactive tax planning.

Tax Treaty Considerations

While primarily a federal issue, international tax treaties can influence state tax obligations indirectly. For instance, income tax treaties might mitigate double taxation. Although states are not parties to foreign tax treaties, your business should be aware of how state and local taxes may interact with these income treaties.

Preparing Your Business for U.S. State and Local Tax Compliance

Successfully navigating the complexities of state and local tax is a critical part of expanding your business into the U.S. By understanding economic nexus, managing sales tax obligations, utilizing consulting services, and staying ahead of emerging trends, your business can maintain compliance, avoid penalties, and improve its operations in the complex state and local tax environment. As the U.S. continues to attract significant FDI, being well-prepared and staying informed will be key to achieving long-term success.

For further insights and guidance on expanding your business into the U.S., reach out to our International Tax team today.

Setting up a business in the U.S. requires thorough planning and an understanding of various regulatory and operational challenges. In this series, we will delve into specific aspects of this process, providing guidance and practical tips. Our next article will dive into pre-arrival tax planning.

The post Master State and Local Taxes for Your U.S. Expansion appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Tech companies have historically faced complex state and local tax challenges, particularly regarding nexus and sales tax.
• Understanding product and service classification, customer types, transaction documents, and research and development activities is crucial to navigating tax challenges.
• Regular nexus reviews and proactive tax planning can help companies determine compliance, mitigate risks, and identify savings opportunities.

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For technology companies, state and local tax (SALT) — particularly issues related to nexus and sales tax — can be a minefield. Here is what you need to know to stay compliant and avoid costly mistakes.

Understanding Nexus and Protected Activities

Nexus determines whether your company has a taxable presence in a state. For today’s tech businesses with customers spanning across the U.S., nexus can be triggered more easily than you might think.

• For sales tax purposes, in addition to physical presence, most states have statutes that establish a “bright line test” based on sales revenue and/or transactions.   Generally, the rule is $100,000 or more in sales and/or more than 200 transactions occurring in a state. This is referred to as “economic nexus.”
• For state/local income tax purposes, in addition to physical presence, some jurisdictions also have a “bright line test” based on the presence of certain factors including property, payroll, or sales in a state. This test is referred to as “the factor presence test.”

Additionally, for net income tax purposes, there is a federal law that protects certain activities performed by taxpayers selling tangible personal property. Public Law 86-272 (PL 86-272) shields most sales solicitation activities — which would normally be subject to income tax — from a state’s jurisdiction. However, assisting with installations, calibrations, or training are among activities typically not protected (even though these tasks may support the sales process). This common selling practice in the tech industry often creates income tax nexus without companies realizing it.

PL 86-272 does not apply to service providers. Thus, to the extent the revenue generated by a tech company is for services (as defined by each state) and the company solely solicits sales in the state, the activity will nonetheless create income tax nexus in that state.

For franchise tax, gross receipts tax and other state/local taxes, nexus thresholds may be far lower than the ones discussed. In addition, the PL 86-272 protections do not apply.

The application of nexus rules by tax type to the tech industry is extremely complex and requires a review by a state tax law professional.

Navigating Sales Tax Complexities

In addition to nexus, sales tax rules can vary significantly from one jurisdiction to another, making compliance challenging for tech companies. Two main factors drive this complexity:

1. Product and Service Classification and Documentation

Different states may classify your product/service in different ways, affecting its taxability. This is especially true in the tech industry where states are continuously examining the definition of software as a service (SaaS). For example, one state might conclude your product/service is software while another state may classify it as data processing. State auditors will review your revenue streams, documentation, etc., to make the determination. This conclusion matters as some states tax data processing while others may not.

The classification also matters in the application of sourcing rules by state. For example, sourcing software revenue may differ state by state. It may be sourced based on where the software or server is located in one state and where the user is located in another state. The complexity arises in applying two (2) sets of rules on the revenue generated from the same transaction.

2. Customer Type

The taxability of your product/service can also depend on the type of customer you sell to. Nonprofit organizations, healthcare facilities, government entities, and wholesalers may be exempt from sales tax in certain jurisdictions. Keeping accurate exemption certificates is essential when selling to a mix of taxable and exempt customers to avoid over collecting or under collecting taxes.

Exploring Tax Credits and Incentives

In addition to understanding your nexus and sales tax obligations, your company may also benefit from exploring tax credits and incentives available at the state and local level such as: 

R&D Tax Credits

Tech companies frequently engage in research and development (R&D), which can qualify for substantial tax benefits. Similar to federal R&D tax credits, many states offer R&D credits that can help reduce your overall tax burden.

Environmental Incentives

As your company expands, you may invest in new office space or facilities, incorporating environmentally friendly technologies. Some states offer environmental tax credits that can help you reduce costs while contributing to sustainability initiatives.

4 Key Strategies for Staying SALT Compliant

Keeping up with state and local tax laws can be overwhelming — especially when they are constantly changing. Here are strategies to help you stay compliant:

1. Understand Your Obligations

Staying compliant starts with understanding how your products and services are classified for both income and sales tax purposes. Each state may treat your offerings differently and understanding whether your product and/or service is taxable, and at what rate, is critical. Additionally, you need to assess your support and sales activities to determine whether they are protected activities, such as those covered by PL86-272, or if they create taxable presence (nexus).

2. Simplify with Software

Sales tax software can help streamline your compliance process. Many tech companies operating in multiple states use this tool to add sales tax automatically to customer invoices. The software calculates the tax rate for each location based on state, local, and district level rules. It can also help with tracking transactions and automating sales tax filings, reducing errors, and saving time.

3. Document Your Decisions

Meticulous documentation is key to maintaining compliance, especially if your company is subject to an audit. Keep records of decisions on tax classifications, nexus determinations, and exemptions. This documentation will be invaluable during an audit — helping you prove that your company acted in good faith and followed the appropriate processes.

4. Conduct Regular Reviews

As your business grows, so do your tax obligations. It is important to periodically review your nexus footprint — especially when expanding into new states or hiring remote employees. A nexus review assesses your corporate and selling activities by state to determine if your company has tax nexus and therefore potential tax exposure and filing obligations. Regular nexus reviews will help you collect and remit sales taxes and pay income and gross receipts taxes in all necessary jurisdictions and avoid penalties for non-compliance.

Taking a Proactive Approach to SALT

As your tech company expands into new markets, staying ahead of state and local tax (SALT) obligations becomes increasingly important. Regular nexus reviews and proactive tax planning not only helps you avoid costly mistakes but also positions your company for sustainable growth.

How MGO Can Help

With extensive experience working with technology companies and a dedicated SALT team, we can help you effectively navigate the complexities of state and local taxes. Through our nexus review process, we analyze your multistate activities — including sales, payroll, and property presence — to develop a tailored SALT compliance plan and resolve outstanding liabilities resulting from unpaid taxes in various jurisdictions.

In addition, our Tax Credits and Incentives team can help you determine if you qualify for any state and local tax credits to offset your tax burden.

Reach out to our team today to gain clarity on your SALT obligations and protect your business.

The post How to Keep Your Growing Tech Company State and Local Tax Compliant appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Massachusetts Tax Amnesty 2024 offers penalty relief for unfiled returns or outstanding tax liabilities from periods before December 31, 2024.
• Eligible taxpayers can request waivers on penalties for personal income, corporate excise, sales and use, and other taxes from November 1 through December 30, 2024.
• MGO’s State and Local Tax team can help you determine eligibility, prepare returns, and file amnesty requests for the program.

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If you are a Massachusetts taxpayer who missed filing a tax return, filed an amended return, has unpaid taxes, or is currently involved in an audit or appellate review, don’t miss this valuable limited-time opportunity to get penalty relief.

From November 1, 2024, to December 30, 2024, the Massachusetts Department of Revenue is offering a tax amnesty program. This program allows eligible taxpayers to request a waiver of penalties on outstanding tax liabilities for any filing periods with a return due date on or before December 31, 2024.

What Types of Taxes Are Covered?

This program includes a variety of tax types, such as:

• Personal Income Tax
• Corporate Excise Tax
• Partnership Income Tax
• Sales and Use Tax
• Trusts and Estates
• Marijuana Retail Tax
• Room Occupancy Tax
• Pass-Through Entity Withholding
• And more (you can find a full list of eligible and ineligible tax types on the Massachusetts Department of Revenue website)

Who Is Eligible?

Taxpayers may qualify for amnesty if they have:

• Unfiled returns, underreported income, or outstanding tax obligations.
• Audits for periods with returns due on or before December 31, 2024.
• Pending resolution or appellate tax board cases.
• Open collection cases.

Who Is NOT Eligible?

Taxpayers are not eligible if they:

• Received amnesty relief in 2015 or 2016 for the same tax type and period.
• Are looking to waive penalties on taxes already paid.
• Are requesting a refund or credit for overpayment.
• Are under a tax-related criminal investigation or prosecution.
• Are currently in bankruptcy.

Special Rules for Non-Filers

For eligible non-filers, the program offers a limited look-back period of three years. This means qualifying non-filers will only need to submit returns for the last three years (January 1, 2022 – December 31, 2024).

However, this limited look-back period does not apply to non-filers who have been contacted by the Massachusetts Department of Revenue about unfiled returns, taxpayers responsible for trustee taxes (such as sales and use, withholding, and marijuana retail taxes), or those filing estate tax returns.

How to Participate in the Amnesty Program

To participate in the Massachusetts tax amnesty program, you must:

1. Submit an amnesty request through MassTaxConnect.
2. Pay the full amount of tax and interest owed by December 30, 2024.
3. File all required returns (via MassTaxConnect or third-party software) by December 30, 2024.

How MGO Can Help 

Navigating the Massachusetts tax amnesty program can be complex. Our State and Local Tax team is here to guide you every step of the way. We can help you:

• Determine if you or your business have a Massachusetts filing obligation.
• Analyze any nexus exposure and find potential liabilities.
• Prepare and file the required returns accurately and on time.
• Confirm your amnesty request is submitted properly in compliance with all state guidelines.

MGO has extensive experience helping clients with state and local tax matters, including amnesty programs. Our team is committed to helping you resolve outstanding tax issues, minimize penalties, and stay compliant with state tax regulations.

Don’t wait — reach out to our team today to find how we can help you save.

The post Massachusetts Tax Amnesty 2024: What You Need to Know appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Key Takeaways:

• Follow U.S. tax requirements by understanding federal, state, and local obligations.
• Adjust your business strategy for the U.S. market by accounting for sales tax variations.
• Utilize tax treaties to minimize tax burdens and navigate international tax rules effectively.

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Navigating the U.S. tax system is a critical aspect of doing business in the United States. Unlike other countries with a single national tax system, the U.S. has a multi-layered structure that includes federal, state, and local taxes. Each layer has its own set of regulations and compliance requirements, which can be varied and complex.

For foreign businesses, this system can be challenging — especially if you are accustomed to a more centralized tax framework. In the U.S., tax obligations can arise not only from physical presence but also from sales or services delivered into a state, requiring your business to report to multiple agencies. It is important to recognize these distinctions for both compliance and tax strategy.

Federal Tax Obligations

What creates a taxable presence for federal income taxes is uniform across the country. Your business must file annual income tax returns with the Internal Revenue Service (IRS), detailing your income, expenses, and tax liabilities. Federal taxes include corporate income taxes, certain payroll taxes, and other specific levies.

While federal taxes are uniform across the country, they may be overridden by an enforceable income tax treaty (more on those below). The uniformity of federal taxation is also, unfortunately, not consistent for state taxation.

State and Local Tax Considerations

State and local taxes vary significantly across the U.S. Individual states can impose income taxes, sales taxes, property taxes, and other business-related taxes on your company. The complexity is further compounded by the fact that different authorities may have unique regulations about what triggers tax obligations — such as physical presence, sales volume, or the delivery of services.

The triggers at the state level do not necessarily coincide with the federal triggers. This can be both an opportunity for tax planning for your company and a potential pitfall if you are not careful.

Value-Added Tax Versus Sales Tax

Unlike the value-added tax (VAT) systems in many other countries, the U.S. sales tax system varies widely from state to state. While businesses in places like Europe often deal with a single national VAT system, the U.S. requires navigation through state and local sales tax regulations — each with its own rates and rules, creating a complex compliance landscape.

While VAT is a tax applied at each stage of the supply chain based on the added value, U.S. sales tax is typically collected only at the ultimate point of sale to the end consumer. This distinction can influence pricing strategies, cash flow management, and overall tax planning for your business.

Impact of Income Tax Treaties

Tax treaties between the U.S. and other countries can influence how your foreign business is taxed. These treaties often provide benefits such as reduced tax rates, exemptions from certain taxes, or simplified compliance requirements. However, they require careful navigation for proper application. The presence of a tax treaty between the U.S. and your home country can affect how you should structure your business operations when entering the U.S. market.

Tax treaties aim to avoid double taxation and ease international trade. They typically cover aspects like income tax on royalties, dividends, interest payments, as well as defining what constitutes a taxable presence. Understanding these treaties is essential for improving tax liabilities and staying compliant with regulations in both the U.S. and your home country.

Navigating U.S. Taxes for Your Foreign Business

Successfully managing U.S. taxes requires a comprehensive understanding of federal, state, and local tax obligations, the nuances of sales tax versus VAT, and the strategic use of income tax treaties. To optimize your tax position and minimize compliance risks, you should prioritize thorough planning and seek professional advice.

How MGO Can Help

MGO’s International Tax team can help you navigate these complexities and develop effective strategies for your U.S. operations. Our experienced team can assist you with tax planning, compliance, treaty analysis, and structuring your business for optimal tax efficiency. For more detailed insights and help, reach out to our team today.

Setting up a business in the U.S. requires thorough planning and an understanding of various regulatory and operational challenges. This series will delve into various aspects of this process, providing guidance and practical tips. Our next article will discuss choosing the right business structure for your U.S. expansion.

The post Understanding U.S. Taxes for Your Foreign Businesse appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Vineyards and wineries often navigate sales and use tax requirements in multiple jurisdictions, with different rules, rates, and exemptions in each state.

• Promotional activities, such as “buy one, get one free” offers, hosting wine tastings, and online advertising can unknowingly create use tax exposure.

• Sales tax compliance software often doesn’t address excise and gross receipts taxes, such as Washington’s B&O tax and Ohio’s CAT.

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Navigating state and local taxes (SALT) is challenging for any business that sells across state lines, but it can be particularly challenging for vineyards and wineries.  

Various excise, sales and use, and gross receipts taxes can apply in different jurisdictions. Not following the complex web of tax rules and regulations can lead to audits, penalties, and even the loss of your license. Fortunately, with the right guidance, you can follow the various state and local tax requirements and even reduce your tax burden.

Understanding Sales and Use Tax Registration and Licensing

Sales and use tax registration and licensing requirements vary by state and depend on whether you ship products directly to consumers. Not all states allow direct-to-consumer shipping, adding another layer of complexity.

Evaluating your sales and use tax exposure requires answering several questions:

1. In which state and local jurisdictions do you have nexus? Sales tax nexus is a connection between your business and a tax jurisdiction that allows the state or local government to impose sales tax on your business. Most states levy a sales tax, and some, including California, Louisiana, and Tennessee, allow localities to impose their own taxes. You can have physical nexus in a jurisdiction by having employees or a location in the area or economic nexus by meeting a threshold for gross receipts or number of transactions.

2. Are you properly registered and paying taxes in that jurisdiction? Some industries might gamble on the cost-benefit analysis of registering and paying sales tax in multiple jurisdictions, but vineyards and wineries must prioritize compliance to maintain their licenses. If your winery has a license or distributes alcohol products in a state, it has nexus and should comply with all relevant tax obligations — regardless of economic thresholds.

3. Are you taking advantage of sales and use tax exemptions in each jurisdiction? Exemptions differ by state. For example, California offers a partial sale and use tax exemption for winery equipment used in manufacturing — such as grape crushers, de-stemmers, presses, bottling equipment, and fermentation tanks. Many states also offer resale exemptions, allowing winemakers to purchase tax-free raw materials like citric acid.

4. Do you have the proper documentation in place? If you take advantage of exemptions, you must have the right documentation. Without proper records, selling the business or facing a sale and use tax audit can be complicated and costly.

A reverse sales tax audit can help you answer these questions. During a reverse sales tax audit, a professional reviews your invoices and purchase orders, researches applicable laws, and thoroughly documents your exemptions. A reverse sales tax audit can also help assess whether you have overpaid sales tax due to missing available exemptions. If that is the case, you can review prior returns, find potential overpayments, and file amended returns to secure refunds.

Unique Vineyard and Winery Sales Tax Issues

The nature of the wine business brings some unique challenges to sales and use tax compliance. Here are a few issues to consider:

Promotions and Use Tax

Many wineries conduct “buy one, get one free” offers without realizing they must pay use tax on the free item and remit it to the state.

Often, a simple change of wording in the promotion, like changing it to “Buy 2 and get 50% off the total,” can eliminate use tax exposure.

Store Displays

Another area of concern is giving displays to stores. If the winery doesn’t sell the display to the store, the winery IS the final customer. If the winery didn’t pay sales tax on the display purchase, it must report and pay use tax on the item.

Event Marketing and Advertising

Many vineyards and wineries deploy sales representatives to host events without realizing this can create physical nexus in many states.

Examples include hosting wine tastings, holding educational events, and participating in festivals and music events.

Even online advertising can unintentionally establish nexus, so it’s crucial to work with an advisor who understands the industry and can help you find potential sales and use tax exposures.

Excise Taxes and Gross Receipts Taxes

Sales and use taxes aren’t the only taxes vineyards and wineries need to consider. Many states also levy excise taxes and/or gross receipts taxes. These are often more aggressive than sales tax because they’re levied on gross receipts with minimal exemptions. Some examples include:

• Washington’s business & occupation (B&O) tax

• Ohio’s commercial activity tax (CAT)

• Texas franchise tax

• Tennessee business tax

While excise and gross receipts taxes often have low rates, they can add up over time if not addressed promptly.

Don’t assume full compliance because you use sales tax compliance software. Some popular tax compliance solutions do not cover gross receipts taxes like Washington’s B&O tax, leading to potential oversights.

How We Can Help

From compliance with sales and use tax requirements to identifying and documenting relevant exemptions, MGO’s State and Local Tax team can review if your vineyard or winery still is compliant and doesn’t overpay your state and local tax liability.

Contact us today for help determining compliance and identifying potential tax-saving opportunities.

The post State and Local Tax Risks and Opportunities for Your Vineyard or Winery appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Sales and use tax rates and regulations change often, and the rules vary widely from state to state. As a result, many businesses find themselves “over-complying” with sales tax rules and neglecting potential savings. For taxes that have already been paid (and that are still within the statute of limitations), you can submit a claim for refund — through a process that is often referred to as a “reverse audit.” In this video, we explore how collaborating with our State and Local Tax team can help you perform a reverse audit to improve your bottom line.

To read more about Reverse Sales Tax Audits read our article here.

To get started working with the MGO State and Local Tax team, click the link HERE.

The post 4 Steps to Recover Overpaid Sales Tax with a Reverse Tax Audit appeared first on MGO CPA | Tax, Audit, and Consulting Services.