For an overseas company looking to expand to the United States, complying with the federal government’s myriad rules and regulations requires an expert’s help. But when combined with the task of doing the same thing on the state and local level, foreign companies often find themselves at a loss, according to two speakers at a recent NYSSCPA International Taxation Conference.

Speaking at the New York City Bar Association, Barry H. Horowitz and John Daly, both tax specialists at their New York City-based firm, talked about some of the major pitfalls that non-U.S. companies encounter when it comes to state and local regulations.

Among the most common issues was that of nexus—that is, determining which jurisdictions are owed tax payments. Since most countries use “permanent establishment,” where taxes are owed based on a company’s fixed place of business, Daly said foreign companies often have trouble wrapping their minds around the concept of nexus, which varies from state to state.

“It’s a fixed place of business that created permanent establishment, which means you have to file federal income tax there,” he said.

Because of this conceptual gap, many companies think they don’t have to pay taxes as long as they don’t have a permanent establishment in that jurisdiction. As a result, they find themselves tripped up by nexus rules, which allow a state to levy tax even if the business has no physical presence. Horowitz pointed out that nexus is particularly relevant in an age where more and more business is done through the Internet.

“I have someone sitting at home working on a computer working for us” in Wyoming, Horowitz used as an example. “Well, you’ve got nexus in that state, you’ve got a presence in that state. I’ve got a server in Wyoming. So, you know what? I have nexus in Wyoming,” said Horowitz.

Making things more complicated is that server access also plays a role in determining nexus. For instance, nexus can be established if a company is leasing a server, but not if a company is sharing it with other people because, in that case, the business is just using a hosting service.

Horowitz also said more states are adopting a concept called “economic nexus,” which has less to do with where a company is located and more to do with where its customers are. New York state itself adopted economic nexus standards in its recent corporate tax reform. Under the new rules, if a company has $1 million of market-based receipts in New York, then it is considered to have nexus there and, thus, owes the state taxes on those receipts. Daly said the concept can give even Americans headaches “because [there are] so many different sets of rules.”

Daly asked the audience to consider a company based in the United Kingdom, dealing with economic nexus rules in California and Connecticut. If a foreign corporation sells more than $536,000 worth of goods and services in California online, then, according to Daly, “California, if they ever wanted to, could go after the company and say, ‘You owe us a tax return.’” By contrast, he said, Connecticut’s economic nexus rules do not apply to foreign corporations at all, unless the income is effectively connected with a U.S. trade or business.

Another area that often trips up foreign businesses trying to set up in the United States is filing a combined return. A company may not have any dealings in the United States, but if a company that it owns does, it may need to file anyway. Say there’s a corporation that has more than 50 percent ownership of another (Daly pointed out that this is the most common control threshold). If the other corporation files in a state with a consolidated filing requirement, then the parent corporation might owe taxes.

Horowitz advised that “structuring things correctly from day one is the most important thing.”

“You’ve got to ask your clients the right questions: What is your business? Where do you have people sitting? Where do you have people doing things? You could have someone going to a state just to solicit business, and [he or she] could be subject to tax. There’s a lot of little traps no one looks at.”