State taxation of a foreign corporation?


M

mikeparker

Some friends an I formed a corporation to serve as a
corporate umbrella for computer programming and other
related work we do. We incorporated in Wyoming; our
corporate office is in Wyoming and all our mail goes
to the corporate office. I am a major shareholder and
plan to be an employee once the company has some clients.
I am a resident of Massachusetts, and expect our first
few major clients to be located in Massachusetts.

The Massachusetts Department of Revenue, at
http://www.dor.state.ma.us/business/taxguide/corpexcise.htm
says that that a company that employs labor in Massachusetts
is liable for Mass excise tax, even if it has no physical
presence in the state. A friend with a fair amount of
experience in businesses that employ telecommuters has told
me we should simply ignore this; that states all make such
claims, but they are unenforcable if the company does not
have a physical presence in the state. He adds that the
same goes for state payroll taxes, but he advocates paying
them anyway. (More specifically, he advocates outsourcing
payroll to a company to take care of those details, which is
what we intend to do.)

Is my friend correct? Can we simply ignore claims made
by Massachusetts[ or any other state where we may have
employees that the State has a right to levy income or
excise tax on our company, merely because we have an
employee in that State? If he is wrong, would it make
any difference if we employed people in other States as
freelance consultants rather then as employees?

Thanks in advance,

Mike
 
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T

TaxSrv

...
The Massachusetts Department of Revenue
says that that a company that employs labor in
Massachusetts is liable for Mass excise tax, even
if it has no physical presence in the state. A friend
with a fair amount of experience in businesses that
employ telecommuters has told me we should
simply ignore this; that states all make such
claims, but they are unenforcable....
How much spread between what the client will pay, and your
salary, will there be? There will be a personal income tax
due on your W-2, and what is that rate? If at least most of
the client billing is paid to you, then there would be
little or no corporate tax on Massachusetts net income. A
quick peek at their corp excise tax form shows they allow
the corp to allocate all of its expenses to Massachusetts
gross income, whether or not the expenses had anything to do
with work done in the Commonwealth.

Fred F.
 
K

Katie

mikepar...@mail2world.com said:
Some friends an I formed a corporation to serve as a
corporate umbrella for computer programming and other
related work we do. We incorporated in Wyoming; our
corporate office is in Wyoming and all our mail goes
to the corporate office. I am a major shareholder and
plan to be an employee once the company has some clients.
I am a resident of Massachusetts, and expect our first
few major clients to be located in Massachusetts.

The Massachusetts Department of Revenue, at
http://www.dor.state.ma.us/business/taxguide/corpexcise.htm
says that that a company that employs labor in Massachusetts
is liable for Mass excise tax, even if it has no physical
presence in the state. A friend with a fair amount of
experience in businesses that employ telecommuters has told
me we should simply ignore this; that states all make such
claims, but they are unenforcable if the company does not
have a physical presence in the state. He adds that the
same goes for state payroll taxes, but he advocates paying
them anyway. (More specifically, he advocates outsourcing
payroll to a company to take care of those details, which is
what we intend to do.)

Is my friend correct? Can we simply ignore claims made
by Massachusetts[ or any other state where we may have
employees that the State has a right to levy income or
excise tax on our company, merely because we have an
employee in that State? If he is wrong, would it make
any difference if we employed people in other States as
freelance consultants rather then as employees?
The state is right, and your friend is wrong. The presence
of employees performing services on behalf of the
corporation in the state IS a physical presence. The
corporation will have nexus in all states where it has
employees, and will be required to register as an employer
in those states. Each of those states will have the power
to tax an apportioned share of the corporation's income.

Depending on the facts, an independent contractor doing the
same things an employee would do may also give the
corporation nexus. However, if you engaged a person or a
company who performed similar services for other clients and
held himself or itself out to the public as doing so, that
person's activities probably would not create nexus for the
corporation. The trick is that if the contractor is an
individual, he or she must be truly an independent
contractor and not an employee.

The IRS has some information on how to distinguish between
an employee and an independent contractor at
http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html.

Katie in San Diego

The foregoing is intended for educational purposes only and does not
constitute legal or professional advice.
 
K

KJ Nichols, CPA

mikepar...@mail2world.com said:
Some friends an I formed a corporation to serve as a
corporate umbrella for computer programming and other
related work we do. We incorporated in Wyoming; our
corporate office is in Wyoming and all our mail goes
to the corporate office. I am a major shareholder and
plan to be an employee once the company has some clients.
I am a resident of Massachusetts, and expect our first
few major clients to be located in Massachusetts.

The Massachusetts Department of Revenue, at
http://www.dor.state.ma.us/business/taxguide/corpexcise.htm
says that that a company that employs labor in Massachusetts
is liable for Mass excise tax, even if it has no physical
presence in the state. A friend with a fair amount of
experience in businesses that employ telecommuters has told
me we should simply ignore this; that states all make such
claims, but they are unenforcable if the company does not
have a physical presence in the state. He adds that the
same goes for state payroll taxes, but he advocates paying
them anyway. (More specifically, he advocates outsourcing
payroll to a company to take care of those details, which is
what we intend to do.)

Is my friend correct? Can we simply ignore claims made
by Massachusetts[ or any other state where we may have
employees that the State has a right to levy income or
excise tax on our company, merely because we have an
employee in that State? If he is wrong, would it make
any difference if we employed people in other States as
freelance consultants rather then as employees?
The answer is, it depends on what the employees working in
the state are doing.

Where you incorporated and claim your home office is
irrelevant. What matters is where the actual work of the
business is being performed. It's called "substance over
form". In short, it means you can call a duck a chicken,
but if it walks, talks and acts like a duck, then its a
duck.

If you perform your duties from your home or office in
Massachusetts, then in all likelyhood your company will owe
some form of taxes to Massachusetts. Bottom line, if
everythng you do is in Massachusetts, then how can you claim
your income is earned in Wyoming?
 
T

traalfaz2

A friend with a fair amount of experience in businesses
that employ telecommuters has told me we should simply
ignore this; that states all make such claims, but they
are unenforcable if the company does not have a physical
presence in the state. He adds that the same goes for
state payroll taxes, but he advocates paying them anyway.
where are the telecommuters or workers based? If they work
in MA, then you would be subject to w/h and unemployment
taxes for MA.

I would sugest that rather than a "friend with a fair amount
of experience" you contact a tax professional with
expereince in MA tax issues for employers and Corp's
operating in MA. Despite the Corp itself not being based
there, it sounds from what you're saying that work will be
performed in MA, but with them being phone workers, that may
not really be the case?

Dave
 
M

Mark Rigotti, CPA

Some friends an I formed a corporation to serve as a
corporate umbrella for computer programming and other
related work we do. We incorporated in Wyoming; our
corporate office is in Wyoming and all our mail goes
to the corporate office. I am a major shareholder and
plan to be an employee once the company has some clients.
I am a resident of Massachusetts, and expect our first
few major clients to be located in Massachusetts.

The Massachusetts Department of Revenue, at
http://www.dor.state.ma.us/business/taxguide/corpexcise.htm
says that that a company that employs labor in Massachusetts
is liable for Mass excise tax, even if it has no physical
presence in the state. A friend with a fair amount of
experience in businesses that employ telecommuters has told
me we should simply ignore this; that states all make such
claims, but they are unenforcable if the company does not
have a physical presence in the state. He adds that the
same goes for state payroll taxes, but he advocates paying
them anyway. (More specifically, he advocates outsourcing
payroll to a company to take care of those details, which is
what we intend to do.)

Is my friend correct? Can we simply ignore claims made
by Massachusetts[ or any other state where we may have
employees that the State has a right to levy income or
excise tax on our company, merely because we have an
employee in that State? If he is wrong, would it make
any difference if we employed people in other States as
freelance consultants rather then as employees?
You are a shareholder and a resident of MA. Now what makes
you think that the corporation DOES NOT have a physical
presence in MA?
 
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C

coloradotaxguy

Unless you're physically doing the work in a state other
than Massachusetts, I think you're way beyond the grey area
of being taxable in Massachusetts.

If the work is done in Massachusetts and the customers are
located in Massachusetts you would probably have to prove
that the income is legitimately taxed by another state to be
exempt from MA tax. An exception is if you were solely a
sales rep and did no other work in MA for the clients.

Even if you could make the corp exempt from MA tax, any
wages and dividends paid to you from the corp would be taxed
by MA since you are a MA resident.

"Gross receipts from sales, other than sales of tangible
personal property, are attributed to Massachusetts if the
income-producing activity that gave rise to the receipts was
performed wholly within Massachusetts. If income-producing
activity is performed both within and without Massachusetts
and if the costs of performing the income-producing activity
are greater in Massachusetts than in any other one state,
then gross receipts are attributed to Massachusetts."
 

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