We expect several state and local tax trends to impact US inbound companies in 2021. These trends include:
- President Biden’s tax proposals and continued conformity
- an increase in state and local taxation, specifically at the local level
- enhanced state focus on transfer pricing
- greater opportunity for tax credits and incentives
- changes in consumption taxes
- telecommuting nexus.
These areas present both challenges and opportunities. Inbound companies may not anticipate significant US state tax liabilities, and therefore may not have robust state tax resources. For example, inbound companies may not be focused on the scope and depth of US state taxation because they are exempt from federal taxation pursuant to an international tax treaty. However, treaties generally do not protect against US state taxation.
Increased activity in a state does not only impact the entity that creates that activity. If the state in question requires combined or consolidated reporting, a single entity has the potential to bring other affiliated members (even foreign members) or their activities within the taxing jurisdiction of states.
Due to a possible lack of focus on state tax, inbound companies may be especially sensitive to changes at the US state level. As a result, the impact of income tax rate and base changes, state tax audit practices, expanded consumption taxes, and state nexus expansion all serve to further complicate the US state tax exposure analysis for inbound companies.