We regularly receive inquiries from international companies and existing international customers regarding the cannabis business in the United States. This and the following two posts answer questions for foreign cannabis companies about when to pay U.S. federal and state taxes, when to register a U.S. business entity, and what options are available to them to start U.S. banking operations.
First, you need to realize that your law firm is sticking to its core competency and focusing on your company’s legal needs rather than fulfilling your tax obligations. You should use a US-based accounting firm to ensure that your tax returns are completed on time and correctly. This may mean hiring a CPA firm with international tax expertise and a local CPA firm where you do business in the United States. Or you might want to hire an international CPA firm to handle both your international and domestic tax obligations.
Many of our international cannabis customers have been very successful in their home countries and have started making some US sales. These sales can be made direct from overseas to consumers, from overseas through brokers, or by doing business directly in the US in the country. Many of these companies understand the potential dangers of international cannabis trafficking and want to make sure they are strictly compliant to avoid business or immigration problems for owners and employees.
US Federal Income Tax
All US income is initially subject to US income tax, unless an income tax treaty is in place between the US and a foreign company’s home country. If a tax treaty applies, the offshore company can apply for a US federal income tax reduction if the offshore company has already paid income tax on that US resident income in the offshore company’s home country. The US has an income tax treaty with 68 countries, many of which go back decades. You might be surprised which countries are on the list: Venezuela, Russia, Malta, Switzerland and Cyprus, and others not on the list: Singapore, Hong Kong, British Virgin Islands, Bermuda, Argentina and Brazil.
Generally, once an international cannabis company completes its first sale in the United States, it incurs some US federal income tax obligations. If you want to continue doing business with the U.S. as an international cannabis company, you’ll want to do whatever you can to take advantage of the income tax savings under an applicable income tax treaty, even if that means first establishing a new subsidiary in a country in which there is an income tax treaty with the United States
As an international company, you can generally choose how you want to be taxed at the US federal level. You should consult a legal and tax advisor to determine your optimal U.S. federal tax classification (c corporation, partnership (LLCs and partnerships), and sole proprietorship (corporation status is not available to international owners).
US State Income Taxes and Related Taxes
US state income taxes vary from state to state, and not all states take into account the effects of an international income tax treaty. For example, California and New Jersey both require state income tax to be paid based on revenue from sales in their states, even if they have a federal tax treaty with a foreign country.
You will need to review the requirements of each state in which you do sales to see if and when it will require payments of income tax or a similar tax. For example, Washington has no state income tax, but has a gross income tax that is also based on sales within Washington. This means that gross income tax is considered to be outside the scope of an income tax treaty. See below:
|Status||Income tax||Other taxes||Remarks|
|Washington (WA)||None||Gross Income Tax (0.484% of Gross Income Tax)||Gross Income = gross income or gross sales of WA buyers|
|California (CA)||8.84% of net income for businesses||Depends on the current business operations||Based on CA sales only, not US or worldwide sales|
|New Jersey (NJ)||6.5-9.0% of net income (percentage change based on income bands)||None identified based on SCA’s current operations||Based on NJ sales only, not US or worldwide sales|
In the states, sellers are generally required to collect and remit monthly or quarterly sales tax payments that are levied on retail sales. Hence, you want to make sure that you collect the appropriate tax amount for each transaction.
None of these states require a company or its US-based brokers to collect sales tax from wholesale buyers, as sales tax is only collected on retail sales. However, international businesses should collect and require their brokers to obtain reseller permission from any wholesale buyer to include in their tax records. The reseller authorization does not have to be presented for every transaction, but can be kept for the duration of the buyer-seller relationship.
Many states also impose an excise tax on marijuana (non-hemp) transactions, which are not considered sales tax.
Potential Immigration Issues When Running a U.S. Marijuana Business
Lastly, I need to highlight the US immigration issue for non-US citizens who are somehow involved or considering getting involved in a US cannabis-marijuana business, be it from their home country or while you are in the US . My colleague Akshat Divatia wrote a cautionary blog post discussing how foreign involvement can cause significant USCIS (US Citizenship and Immigration Services) and USCBP (US Customs and Border Protection) problems. In this post, Akshat wrote:
Even a foreigner who has never used marijuana could be declared inadmissible under the INA [Immigration and Nationality Act] based on his or her involvement in a [U.S.] legal cannabis [marijuana] Business, either as a “knowing helper, advocate, assistant, conspirator or collusion with others” or as an “illegal trafficker” of a controlled substance.
In short, if you are a non-US citizen and want to get involved in any state-legal US marijuana business, and have plans to enter the US, then you should seek help from an immigration attorney In front You come to the USA
More questions to think about
As you digest this information, keep the following questions in mind:
Do you want to do business with the US directly by becoming a seller? Or do you want to start a new company in a country to benefit from an income tax treaty?
- How is this company taxed if you do business with the US directly?
- How important is it to you to simplify your US obligations, and would it be more beneficial to have a wholly owned US subsidiary to simplify your US state registrations, tax payments, and US banking operations?
Stay tuned for the upcoming posts in this series on US banking for international cannabis companies and international cannabis registration requirements.