Who does an online business pay tax to?

[EastWind]

If you own an online business in one state, but you are selling to customers in different states, where does your business pay taxes to? Assuming we have an LLC.

I live in the midwest, I'm wondering if there will be an advantage to getting a Nevada LLC taxed as an S corp.

 

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[LightHouse]

You pay sales tax from orders within your state, and your normal state and fed on revenues. The feds have been trying to pass laws requiring it to be collected in all states which would make accounting a nightmare.

 

[EastWind]

Generally you will pay Federal tax and state taxes in the state where you operate.

That said, depending on how you want to interpret the laws, you may be subject to sales tax depending on where you are located and where your buyers come from...

okay, since it's a software service. the server, system will be cohosted and i have no idea where. once the business is up and running, i really wouldn't be doing any business except making a few phone calls, working from laptop. no office space. so if i happen to be in FL or NV when I make those phone calls and work from my laptop, is that going to be my working location? it's going to be a service, and i hope to have customers from all 50 states.

 

[WinWin]

okay, since it's a software service. the server, system will be cohosted and i have no idea where. once the business is up and running, i really wouldn't be doing any business except making a few phone calls, working from laptop. no office space. so if i happen to be in FL or NV when I make those phone calls and work from my laptop, is that going to be my working location? it's going to be a service, and i hope to have customers from all 50 states.

As a business you are subject to 3 types of taxes.

1. Federal Tax
2. State Tax
3. Sales Tax

All these taxes are based on where your LLC is incorporated. Not based on where you made a transaction. As long as you don't have a physical office anywhere else other than the state in which your LLC is registered all your local state rules apply regarding your taxes.

Sales tax is only applicable to goods. Services are not subject to sales tax.

[I am not an accountant or an attorney]

Edit:

I stand corrected. What JScott posted below is legaly accurate. What I was stating was a typical scenario where the state of residence of the owners and and the LLC registration being the same, but my statement was not legally accurate.

Thanks JScott

Therefore, from what I understand, taxes are NOT paid in the state where the LLC is organzed, but in the state where the people (the shareholders) who receive the income reside.

 

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[CactusWren]

I have an online biz in AZ. What I do is charge state tax and county tax (luckily I am not in the city because that would be added too!) and pay monthly taxes to the state. After one year you can start paying/filing every quarter.

I only charge tax to AZ billing addresses. The others are tax exempt.

 

[Bobo]

Why in the world are you hosting and incorporating this business in the US?

You not only open yourself up to more taxes but to litigation. Your business is virtual, stick it on a server in the Caymans or somewhere. You still have to pay the IRS (Even if you move offshore for good and renounce your citizenship, the IRS says you owe for ten years and they will attempt to come after you). So you can't avoid them but if you are only moving bits and not hard product then it makes little sense to me to do it here.

 

[GlobalWealth]

Why in the world are you hosting and incorporating this business in the US?

You not only open yourself up to more taxes but to litigation. Your business is virtual, stick it on a server in the Caymans or somewhere. You still have to pay the IRS (Even if you move offshore for good and renounce your citizenship, the IRS says you owe for ten years and they will attempt to come after you). So you can't avoid them but if you are only moving bits and not hard product then it makes little sense to me to do it here.

I have been researching this for a few clients over the past few weeks. There is actually an opportunity for the right business to operate offshore where the company pays zero in taxes. Of course if you, as the owner, take any income, you will pay your personal income tax. For example, if your company earns $500k in profit and you pay yourself a $100k salary, you would only pay tax on your $100k. You could indefinitely defer tax on the $400k. When you repatriate this income, you will pay your US tax. This is a pretty complex strategy and requires a lot of planning, for for some, it can be very, very beneficial.

I actually just wrote about this topic in my newsletter last week. I have several clients taking advantage of this, but again, this won't work for everyone.

As for the LLC, it is completely flow through. You will be taxed in your state of residence regardless of where the LLC is registered. There are great asset protection reasons for registering a virtualy business in NV, but taxation isn't one of them, unless of course you live in NV (no state income tax).

 

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[EastWind]

Why in the world are you hosting and incorporating this business in the US?

You not only open yourself up to more taxes but to litigation. Your business is virtual, stick it on a server in the Caymans or somewhere. You still have to pay the IRS (Even if you move offshore for good and renounce your citizenship, the IRS says you owe for ten years and they will attempt to come after you). So you can't avoid them but if you are only moving bits and not hard product then it makes little sense to me to do it here.

never thought of that. how do i go about doing that? thanks for the idea tho. i always figured opening up a business in another country and server say in the caymans will just make you seem like someone trying to evade taxes.

 

[Bobo]

never thought of that. how do i go about doing that? thanks for the idea tho. i always figured opening up a business in another country and server say in the caymans will just make you seem like someone trying to evade taxes.

There is a big difference between tax evasion and tax AVOIDANCE. like, 20 years or so.

Repatriating the money incurs taxes, unless of course you live overseas for most of the year in which case the first $85K or so is exempted.

However, your corporation can have legit business expenses in the US, your trips to Cayman where your corp is located is a legit business expense. There is a difference between that which the taxman may be sniffy about and that which he can do jack shit about (accounting term).

There is another motivation here and that is legal. We currently have a government that favors heavy government oversight of business. No, that's not a political jab - I am not debating whether that is good or bad, just acknowledging that it IS. Now, when the US government imposes regulatory control over the internet, or tries to, US businesses will be subject to compliance or will face prosecution in federal court.

If say, a Cayman corporation is doing something on the net that some administration is inclined to tax, censor or otherwise molest your business has the freedom to say "Hey I know, why don't you go f--- yourself. A liberating phrase when dealing with bureaucracy as long as they can't touch you.

Also, let's say that some company feels like you are infringing on their turf and decides to file a nuisance suit against you or some private individual decides to sue you for slander or whatever. You once again have the freedom to ignore them as they can't bring you into a courtroom that has no jurisdiction over your business.

As a business owner, you have the right to seek out a location for your business that best insulates you from any negative actions by government or anyone else. I am not advocating using an offshore to launder money illegally, I'm advocating that you maximize your freedom and protection from oversight, litigation and taxation to the best of your ability. American corporations are the most heavily taxed and regulated in the world or close to it.

If you can't beat'm, screw'm.

Google the topic - there are lots of offshore 'shelf corps' already setup where you can buy a biz in a box legally and the steps for doing it on your own are well documented.

 

[EastWind]

There is a big difference between tax evasion and tax AVOIDANCE. like, 20 years or so.

Repatriating the money incurs taxes, unless of course you live overseas for most of the year in which case the first $85K or so is exempted.

However, your corporation can have legit business expenses in the US, your trips to Cayman where your corp is located is a legit business expense. There is a difference between that which the taxman may be sniffy about and that which he can do jack shit about (accounting term).

There is another motivation here and that is legal. We currently have a government that favors heavy government oversight of business. No, that's not a political jab - I am not debating whether that is good or bad, just acknowledging that it IS. Now, when the US government imposes regulatory control over the internet, or tries to, US businesses will be subject to compliance or will face prosecution in federal court.

If say, a Cayman corporation is doing something on the net that some administration is inclined to tax, censor or otherwise molest your business has the freedom to say "Hey I know, why don't you go f--- yourself. A liberating phrase when dealing with bureaucracy as long as they can't touch you.

Also, let's say that some company feels like you are infringing on their turf and decides to file a nuisance suit against you or some private individual decides to sue you for slander or whatever. You once again have the freedom to ignore them as they can't bring you into a courtroom that has no jurisdiction over your business.

As a business owner, you have the right to seek out a location for your business that best insulates you from any negative actions by government or anyone else. I am not advocating using an offshore to launder money illegally, I'm advocating that you maximize your freedom and protection from oversight, litigation and taxation to the best of your ability. American corporations are the most heavily taxed and regulated in the world or close to it.

If you can't beat'm, screw'm.

Google the topic - there are lots of offshore 'shelf corps' already setup where you can buy a biz in a box legally and the steps for doing it on your own are well documented.

well, how does one start when one is starting a small business? do I start a local biz first, then when I'm making a profit, start an offshore biz and move everything there?

 

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[GlobalWealth]

well, how does one start when one is starting a small business? do I start a local biz first, then when I'm making a profit, start an offshore biz and move everything there?

Honestly this is entirely too complicated to discuss all the details in an online forum because each person's situation is so different. But essentially you need to sever physical ties to the US. I can give you an example of a recent client (I am changing names and location, but situation is real).

Fred runs an web based company that sells promotional items; ie. tshirts, hats, pens, etc. His business is located in CA but sells to clients all over the world. Fred is opening an Belize IBC (basically an LLC) to run his business. He is moving his web site and email hosting to a company in eastern europe. His new Belize company has a bank account in Denmark. He is even hiring 1-3 administrative personnel in Belize (there are companies that provide this outsource function). He is closing his CA office and working remotely from wherever he is located. While this may sound complicated, it really isn't. I walked him through most of this process. He also has hired an excellent CPA who is very knowledgible about offshore taxation (this is key). He will continue to pay himself the same salary as before and continue to pay his normal income tax on that salary. However, his business' profits are several hundred thousand $'s each year, and he will not pay tax on that until this income is repatriated into the US. He can defer this income indefinitely and invest it however he wishes.

Imagine how much you can earn if you compound your investments tax free for 10 years? 20? Of course there are lots of details and legal filings you must keep up with which is why having proper counsel and a very good CPA is critical. You don't want to run afoul of the IRS. They are most likely the most powerful and far reaching organization in the world with virtually unlimited resources. As long as you file all the proper documentation and follow the letter of the law, this is completely legal.

To answer your question about how to start, this too depends on your situation. If the online biz is likely to stay small, this isn't a very good solution. You don't want to pay $20k per year in advisors to save $15k per year in taxes. But if your income is or will be $100's of k's per year, then maybe you should consider this from the start.

Aside from the legal filings with the govt, this isn't really any more complex than starting a business in your home state. With the technology available to us today, location is really unimportant for many businesses. For example, what difference does it make if you bank in Denmark, Hong Kong, or the Bank of America on the corner if you do it all online anyway? From a practical standpoint, nothing. But by having your banking in another country, this constitutes severing physical ties with the US which is a critical component of legally doing business offshore.

The same is true of where you host your website and email. From a practical standpoint, does it really matter where the servers are located? If you live in CA now and the servers are in FL, is it really any different if they are in India? Not really, but this too severs this tie.

Also as Bobo mentioned, up to a certain amount of income is tax free if you live abroad. In 2009 it was $91,500 (it was $85k 3 years ago I think). If you are married, pay your spouse $91,500 from the business. You also get a $15,000 housing credit on your taxes. You would also not owe a state tax as you would no longer be resident there. So you could earn about $200k tax free living abroad and if you run your business in the right offshore jurisdiction, it could operate tax deferred as well. You must fit one of two different criteria here to qualify for this. You must either establish residence in the foreign country, or be physically outside of the US 330 days out of a 12 month consecutive period. So if you move abroad mid year, but stay abroad over 330 days, you would pro rate it in that first year. But you must be careful which country you live in as you may end up owing taxes in the host country. It is best to find a country that does not tax residents on foreign sourced income.

If structured properly you could live a tax free life, but there are many details and you should seek proper counsel for this type of planning. It could save you an enormous amount of money to get it right from the beginning.

 

[Bond]

Interesting discussion.
I've been thinking about having an operation outside Portugal, where i live and, still, have my company for a number of years but didn't delved too much.

GlobalWealth, for a guy in Portugal where do you think it's better to create an offshore company? Gibraltar? Jersey? Belize? Caymans?

Another question is: If i have some kind of online business and my server is in the US, can the IRS come after me since some of my clients are US citizens and i would accept money from them?
I know a story about PlentyOfFish where Markus(owner, canadian) earns more than $10million a year and his servers are in Canada so the IRS gave him a call but they can't do anything because he's not in the US.

 

[GlobalWealth]

Interesting discussion.
I've been thinking about having an operation outside Portugal, where i live and, still, have my company for a number of years but didn't delved too much.

GlobalWealth, for a guy in Portugal where do you think it's better to create an offshore company? Gibraltar? Jersey? Belize? Caymans?

Another question is: If i have some kind of online business and my server is in the US, can the IRS come after me since some of my clients are US citizens and i would accept money from them?
I know a story about PlentyOfFish where Markus(owner, canadian) earns more than $10million a year and his servers are in Canada so the IRS gave him a call but they can't do anything because he's not in the US.

I am assuming you are a Portugese citizen for this example. Ironically, the US is the biggest tax haven for foreign nationals. For you, I would most likely recommend a US NV LLC for ownership, but keep the servers outside of the US. I would probably have a banking presence in the US, but keep very little cash there. Also have a bank outside of the US to hold most of your cash.

If most of your customers are US, I would recommend either Belize, Nevis or Panama for your business structure. If you have a US LLC, you could be liable for income tax on your US derived income. But if you are Portugese, with a Nevis LLC, banking in Denmark, servers in Canada, and customers in the US, the IRS would have much difficulty in pursuing you.

 

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[Bond]

I am assuming you are a Portugese citizen for this example. Ironically, the US is the biggest tax haven for foreign nationals. For you, I would most likely recommend a US NV LLC for ownership, but keep the servers outside of the US. I would probably have a banking presence in the US, but keep very little cash there. Also have a bank outside of the US to hold most of your cash.

If most of your customers are US, I would recommend either Belize, Nevis or Panama for your business structure. If you have a US LLC, you could be liable for income tax on your US derived income. But if you are Portugese, with a Nevis LLC, banking in Denmark, servers in Canada, and customers in the US, the IRS would have much difficulty in pursuing you.

Yes, i'm Portuguese.
When saying NV you mean Nevada right?
Interesting info. So do you do this kind of setup?

 

[GlobalWealth]

Yes, i'm Portuguese.
When saying NV you mean Nevada right?
Interesting info. So do you do this kind of setup?

Sorry, yes NV is Nevada. And yes, this is exactly what I do. FYI Cascais is one of my favorite places in the world.

 

[Bond]

Sorry, yes NV is Nevada. And yes, this is exactly what I do. FYI Cascais is one of my favorite places in the world.

Any reason to chose Nevada instead of Delaware ?
Cascais is a great place. I live in the north, near Porto.

 

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[GlobalWealth]

Any reason to chose Nevada instead of Delaware ?
Cascais is a great place. I live in the north, near Porto.

Actually DE is good too. For asset protection purposes I generally use NV, DE or WY. For any non-US national I also use these states for registration.

 

[Bond]

In your opinion this should be done with a startup or one should wait until having X revenue to do it?
Can you give us an idea of how much this would cost to setup?

 

[GlobalWealth]

In your opinion this should be done with a startup or one should wait until having X revenue to do it?
Can you give us an idea of how much this would cost to setup?

At this point, this should be taken offline from the forum. I don't think this is appropriate here. You can PM or email me if you wish.

 

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[thinkingbig]

cool relevant thread. i'm thinking of starting an online database.