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  Every Israeli business selling goods or services in the United States knows that federal income tax requirements demand attention.  By contrast, the requirements of state and local taxes are far less known, and planning for these taxes occurs far less frequently than for federal income taxes.  This is unfortunate, as state and local taxes can be quite costly.  Indeed, unlike the federal tax, state and local taxes can directly increase the price paid by a business’s customers by as much as 7% to 9% and, therefore, can directly affect a business’s sales volume.   This State Tax Alert provides an introduction to the who, what, where, and when of American state and local taxes.
All businesses operating in the United States are potentially liable for state and local taxes.  This includes businesses that do not have a “permanent establishment” in the United States for federal income tax purposes and businesses that are disregarded or treated as pass through entities for federal income tax purposes (for example, limited liability companies and partnerships).  In addition, the partners, members, officers, directors and anyone a state determines to be a “responsible person” of a business can be held liable for the business’s unpaid state and local taxes.

There are a variety of state and local taxes.  These include taxes on transactions (for example, sales tax, use tax, real property transfer tax, etc.), taxes on income and net worth, payroll taxes, and numerous taxes imposed in exchange for allowing a business to conduct specified activities in the state.  In addition, state unclaimed property remittance requirements are a “non-tax tax”, by which businesses are required to deliver to the states credits, refunds, dividends, payroll checks and other amounts left unclaimed by customers, vendors, employees and others.   

Every state imposes several state and local taxes.  In addition, taxes are imposed by many cities, counties and other municipalities.

States require satisfaction of filing requirements at least annually, sometimes monthly, and occasionally weekly, depending on the tax type.

Fortunately, planning can reduce state and local tax liabilities.  For example, businesses are required to collect sales taxes in states where they have a physical presence.  Controlling physical presence is one way of controlling sales tax liability.  In addition, manufacturers and vendors who know that the goods or services they sell qualify for sales tax exemptions or other nontaxable treatments increase the desirability of their goods and services.  Therefore, businesses can be significantly advantaged by obtaining rulings from selected state tax administrators regarding the treatment of sales of the business’s goods or services.

This Alert provides an introduction to American state and local taxes.  For further information and assistance with state and local tax issues anywhere in the United States, please contact David A. Fruchtman at 04-629-0520 or at 312-281-1111.


*David A. Fruchtman is an attorney in the United States. He is not admitted to the Israeli Bar. He is Of Counsel to Horwood Marcus & Berk Chartered, located at 180 N. LaSalle Street, Suite 3700, Chicago, Illinois 60601. He is a Harvard Law School graduate and is chairman of the American Bar Association’s Income and Franchise Taxes subcommittee. He has been named by his peers as one of Chicago’s Leading Tax Lawyers. Horwood Marcus & Berk Chartered has one of the largest state and local tax law practices in the United States. The firm provides tax planning advice to clients of all sizes and has successfully represented clients before courts and administrative tribunals throughout the country, including at the United States Supreme Court.

  This Alert is for discussion purposes only and does not constitute tax advice; consequently, it is not subject to the attorney-client privilege and does not constitute attorney work product. This Alert may be disclosed to any and all persons, without limitation of any kind, including any potential tax treatment or tax structure of any transaction described hereon. This Alert does not provide federal tax advice and was not prepared in a form to comply with the requirements of an opinion upon which a taxpayer can rely to avoid certain penalties under the Internal Revenue Code of 1986, as amended. No fee was received in connection with producing this Alert. Copyright © 2005