USA taxes for UK SMEs
We like paying tax. It means we’re making money, which is a measure by which business success is generally judged. Who wants to deal with an unprofitable company?
When it comes to taxation, the USA is more like 51 countries (50 states and one district – all autonomous) than one federation. There are:
- Federal taxes
- State taxes
- Local taxes
The above are applied in some way or another to:
- Other entities and organizations.
All of which suggests you need a USA accountant to help you through the complexities. Actually, the USA tax system is no more complex than the UK one looks to an American. As some 27 million businesses in the USA seem to manage to deal with their taxes, perhaps it is not so complex after all.
Our company does not offer or provide legal or financial advice. We are, however, prepared to share our own experience and that of our clients. We suggest to every company we talk with to engage a USA accountant in the USA (and not necessarily an affiliate of a UK accounting firm) to advise on financial issues. It is helpful if your USA accountant and USA attorney have experience of representing UK companies and work well together.
As at January 2010, all states except Alaska, Delaware, Montana, New Hampshire and Oregon, collect sales taxes. Delaware collects a Gross Receipts Tax (GRT), which is a business and gross receipts tax. Some have a single rate throughout the state though most permit local city and county additions to the base tax rate.
States with the highest sales tax are: California (8.75%), Indiana (7%), Mississippi (7%), New Jersey (7%), Rhode Island (7%), Tennessee (7%), Minnesota (6.875%), Nevada (6.85%), Washington (6.5%), Texas, and Illinois (6.25%).
Of the 50 states, 41 impose income taxes. New Hampshire and Tennessee apply it only to income from interest and dividends. Seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) do not tax personal income.
Sales and Use Tax
Think of “sales and use” taxes as being comparable with the UK’s Value Added Tax, but with some “plus points.”
We use Florida as an example because that is where the majority of our clients are incorporated, headquartered and trade. We use “you” to simplify the subject.
Florida law mandates a minimum sales and use tax rate of 6%. There are also provisions for counties to set their own local tax, meaning at present you could have to collect as much as 7% from your Florida-based customers.
Government entities, religious organizations and non-profit organizations are exempt from paying and, therefore, you from collecting sales and use tax.
When you sell to organizations outside of Florida, they may (almost certainly will) have a responsibility to pay a use tax. That is their responsibility, not yours.
Also, if someone purchases your products for re-sale, they are exempt from the sales tax (which will fall on the eventual buyer/user). This would apply to your resellers.
Inevitably, there are some fine points: use tax is due on purchases made out of state and brought into Florida within six months of the purchase date; a product bought with plans to resell the item (therefore exempt from the sales tax) but ending up being used requires payment on the use tax on the item; materials purchased to produce a product which are not part of the end product (anything from manufacturing equipment in a factory to a spoon in a restaurant), incur a use tax on the item.
Tax friendly states
Surveys conducted by the Small Business & Entrepreneurship Council (SBEC) are both interesting and helpful. The SBEC’s “Business Tax Index 2010” ranked the states from best to worst in terms of the costs of their tax systems on entrepreneurship and small business. The Index pulls together 16 different tax measures, and combines those into one tax score that allows the 50 states and District of Columbia to be compared and ranked.
The survey finds the ten best state tax systems are:
- South Dakota
The ten worst state tax systems are:
- District of Columbia
- New Jersey
- New York
The survey also looks at state personal income tax. Tied equal first are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington (state) and Wyoming – all of which have no state income tax. Delaware rates 37th with New York 47th and California 48th.
State rankings of capital gains tax are also listed. Florida is again tied in first place with Delaware 39th, New York 48th and California 49th.
Top corporate income tax rates are also ranked. Florida comes out at 14th, New York at 36th, Delaware at 41st and California at 42nd. The District of Colombia (ie Washington, DC) is ranked 50th out of 51.
We chose to locate our US headquarters in Clearwater, Florida, a tax and business friendly state with an excellent labor force and vibrant economy linked to the UK with plentiful, economical flights. We also find it is a lovely place to live, work and visit.
Appoint an accountant in the USA (or in the UK if they have appropriate and current USA expertise). They should help with statutory fillings, tax planning, and profit repatriation – and they should save you more than they cost.
Your accountant is the best person to advise and make sure you take advantage of the treaty between the UK and USA to avoid double taxation.
There are more than a million accountants in the USA. Not all of them are outrageously expensive. Not all of them specialize in commercial requirements. Not all of them are experienced in dealing with UK companies in the USA.
Establish a client relationship at an early opportunity. You will not usually need to pay a retainer, but until you have an established credit history in the USA, do be prepared to pay a deposit against the cost of work you commission.
The worst time to look for an accountant is when you need one.
About this document
This document was first published in August 2012. It is an extract from “USA success for UK SMEs” copies of which are available without charge or obligation on request from firstname.lastname@example.org.
This document is published by ExportAction, a UK SME working to help other UK SMEs add sales, profits and value to their companies by assisting them establish, develop and manage business in the world’s largest, single-country market, the USA.
The content of this document is the copyright of ExportAction Ltd and ExportAction, LLC. All trademarks are the properties of their respective owners and their use is acknowledged.
We have made reasonable efforts to make this document accurate and up-to-date, but ExportAction accepts no responsibility for any loss or damage caused to any person or business as result of any information in this document. The information in this document is subject to charge without notice.
This document is an information guide only and not a substitute for your own research or independent advice.
ExportAction does not offer or provide financial or legal advice and recommends taking appropriate professional advice before investing any business project or venture.
ExportAction was founded in 2007 with decades of experience of doing business in the USA. The company is owner-managed, self-financed, debt-free, profitable and growing.
ExportAction is now working with client companies in California, Florida, Georgia, Massachusetts, New Jersey, New York, North Carolina, Oregon, Pennsylvania, and Washington. We are able to provide services throughout the USA.
Please visit our web site at www.ExportAction.com or call our UK office on 0845 5280 567.
Topics: Getting Started and Taxation