This week’s tax question:
If I live abroad, and my businesses are all online, do I still have to pay U.S. taxes?
We passed the question on to Michael Bowen of the law firm Akerman Senterfitt, where he’s chair of the state and local taxation practice. He also is a guest lecturer at Harvard University on corporate taxation. Here’s his answer:
This question – although simple – elicits a somewhat complicated answer.
First, it’s important to distinguish between federal as opposed to state and local taxes. In general, if the businesses are incorporated, domiciled, etc., in a foreign country and the owner is not a U.S. citizen, then no federal taxes would be due. If either of these assumptions is incorrect, the answer can quickly change depending on the specific facts. The other complicating factor on the federal side is the presence or absence of a tax treaty existing between the U.S. and the home country of the business. A tax treaty may provide additional protections to a foreign business not otherwise available in the general federal income tax law. (Look on the IRS website for detailed information about such treaties.)
State and local taxes should be considered separately. This is true whether or not federal taxes apply. In the U.S., states are sovereign and have their own tax laws. The state and local rules of taxation vary widely across jurisdictions. To add a further layer of complexity, unlike federal tax, there are many varying types of state and local taxes. For example, there are corporate excise taxes, gross receipts taxes, sales tax, use taxes, franchise taxes and net worth taxes—to name a few.
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The fact that the business is online (or virtual) does not necessarily mean that it will escape federal or state and local taxes. Much will depend on the specific facts of the case and what states and localities it does business.
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