UK Exporter’s Introduction to US Taxes
UK companies selling goods to US customers often assume that no US tax obligations will result from their activities. Sometimes the assumption is correct; more often it is not. Here are the main US tax obligations of which UK exporters must be aware.
Federal Income Tax. If you are selling goods to US customers, US tax law considers the sale to occur in the country where title to the goods passes. Thus, for example, a UK exporter which ships to a US customer from a US based warehouse has engaged in a US sourced sale. Furthermore, many contracts provide that title will remain with the seller until the buyer has paid for the goods. If the buyer is in the US, this results in a US sourced sale. In addition, while transfer of title is conceptually distinct from transfer of risk (the latter of which is usually defined by the parties’ chosen Incoterm), US tax law provides that where “bare legal title” is retained by the seller, the sale is deemed to have occurred where beneficial ownership and risk of loss passes to the buyer. Thus, a UK seller who sells to a US based customer on DPU, DAP, or DDP terms will usually have US sourced income. (US buyers purchasing under conditions in which the sale is sourced to the US may request that the UK seller complete Form W8-BEN-E or W8-BEN to determine whether tax on the transaction must be withheld from the payment.) Under the US-UK tax treaty, US sourced income does not necessarily give rise to an obligation to pay US federal tax. At a minimum, however, it will result in an obligation to annually file a claim for treaty benefits (known as Form 8833), which is usually filed with a foreign tax return, known as a “protective 1120-F.” A UK corporation’s failure to file Form 8833 results in an automatic penalty of $10,000 for each failure.
State Corporate Income Tax. US states are not obligated to follow federal tax treaties. Each state decides for itself – within the constraints of the “nexus” rules of the US constitution – whether an out-of-state corporation is required to pay corporate income tax on profits “fairly apportioned” to their jurisdiction. In addition, contrary to what many UK companies may believe, the rules governing a corporation’s obligation to pay state corporation tax are the same for UK companies as they are for US companies. The presence of inventory (even in a third-party warehouse) or of independent sales representatives in a state will usually give rise to an obligation to pay corporate income tax to that state. In addition, sales sourced to a given state in excess of certain monetary thresholds may give rise to a state corporate income tax obligation. Note, however, that state sourcing rules will often be different than the federal sourcing rule discussed above.
Sales Tax. Like corporate income tax laws, the laws dictating whether sales tax must be collected and remitted treat UK corporations identically to US corporations. To further complicate matters, the “nexus” rules that apply to state corporate income tax are not the same as the “nexus” rules that apply to state sales tax. As a general rule, a UK company selling to US customers must register, collect, and remit sales tax in any state where: (1) the company has a physical presence (e.g,. inventory); or (2) the company has exceeded certain economic nexus thresholds. While each state decides for itself which economic nexus threshold is to apply, the most common threshold is $100,000 or more in sales per year or 200 transactions per year. Note that, as with corporate income tax, sales tax sourcing rules are not the same as the federal sourcing rule above. Generally, for sales tax purposes, a sale is sourced to the state of shipment, regardless of where title to the goods passes.
Customs Duties. UK exporters are likely most familiar with their obligation to pay customs duties at import. Duties will be imposed in accordance with the Harmonized Tariff Schedule of the United States (HTSUS), unless the value of the shipment is $800 or less. Typically, the calculation of import duties is straightforward, although issues of valuation may occur (especially in the case of “assists” or commissions, or when value is based upon other than transaction value).