When a Corporation or LLC operates in and has a “physical presence” in a state other than the one in which it was formed, that company must also register for the authority to do business in that “foreign” state.Also known as foreign authority, this registration in a foreign state makes the company ‘official’ there, so that it is fully covered by its laws, and treated very much like a domestically filed INC or LLC in that state.This also means that the foreign company must pay state taxes just like any domestically formed company
and collect sales taxes on taxable sales.
But what is physical presence?
Also known as nexus, physical presence occurs when an entity is operating physically in that state.
In 1992 the Supreme Court case Quill Corp. v. North Dakota, the office supply retailer Quill had no presence in North Dakota, but it had customers in North Dakota that placed orders directly through a computer program.North Dakota attempted to impose a use tax on Quill, but this was struck down by the Supreme Court, holding that a business whose only contacts with the taxing state are by mail or by common carrier lacks the "substantial nexus" required under the Dorment Commerce Clause.Essentially the Supreme Court ruled that a business must have a physical presence in a state for that state to require it to collect sales taxes.The court also explicitly stated that Congress can overrule the decision through legislation.
How do you know when your entity is physically present?
Physical presence has typically been accepted to have occurred when a company has a physical location, such as a store, warehouse, or office located in the foreign state. Left out of this definition are many businesses who sell to customers via the Internet, or through affiliates, or through contract relationships located in other states. Typically, it is the foreign state who defines more when physical presence has occurred in that state.However, most states have not, so many businesses have found this concept a little grayer when trying to apply it to themselves.
Why is it an issue?
Internet sales are now a substantial part of the US economy, growing to $1.4 trillion in 2010.Consequently, large retailers have been complaining about lost revenue and states a corresponding loss of sales tax revenue, all due to Internet businesses that do not otherwise have a physical presence in their state, and are therefore not formally registered there.To correct this implied unfair competition, some states such as New York & California have set up new rules, specifically targeting larger Internet companies such as Amazon.com, requiring collection of sales taxes by instate merchants who have affiliate contracts, like they do with Amazon.
Other states have tried to address the open definition of physical presence, through laws and more aggressive tax policy to capture sales taxes from online merchants.But, determining presence is still difficult for most business, except in the more obvious, brick and mortar operations.Without any guidence from the foreign state, most are forced to check with their tax advisor to find out to what industry or business activity their state has assigned the definition of physical presence, or is more aggressively pursuing taxes.
Even when a company does not have physical presence by most definitions, there can be cases where foreign authority must still be obtained. For instance, New York banking laws require that a company be registered in New York to be able to open a bank account in New York.
Need help registering for foreign authority?
SmallBiZ Filings can help!
We can assist you with registering in every state for typically $75 + state fees
There is a potentially new federal law requiring merchants to be responsible to all state’s tax rules if their customers are from that state.This Internet Sales Tax is being pushed heavily and could become law.Receiving pressure from large retail companies, retail trade groups, and states with large budget deficits, Congress is specifically addressing the opening the Supreme Court left it to change physical presence.
As it is currently written, if this law is approved, many companies deemed "catalog companies" or "remote sellers" with customers in other states may be required to register for foreign authority in every state to properly comply with each state's laws.Read “The new Internet Tax Law is a small biz killer!” for more info.
CEO & Founder of SmallBiZ.com, created over seventeen years ago to help small business owners simplify the process of starting & managing their small businesses. SmallBiZ.com now serves over 10,000 businesses per year with various filing and subscription services; in addition to the 1000's of daily visitors to www.smallbiz.com, accessing free services, help pages, & educational videos & webinars.