Many businesses, including Canadian and other foreign businesses, are surprised to learn that they may be subject to income or business activity taxes in various U.S. states notwithstanding the lack of an office, factory or other place of business in a state (called a “permanent establishment” under U.S. bilateral tax treaties). More and more U.S. states are enacting standards of economic presence in a state or “nexus” (as opposed to a “physical presence”), which rule still applies in other states and to certain types of taxes, most notably sales tax.

Moreover, states are also adopting “market sourcing” apportionment rules that attribute revenues from services to the state of customer location rather than where the services are performed by the provider.

U.S. multistate tax planning and compliance is becoming more complex and it is obviously beneficial for companies to be aware of where they are deemed to be doing business for tax purposes and to plan for state tax costs prospectively instead of facing tax assessments for prior periods.