This is my third article designed to help UK companies which are considering setting up a USA subsidiary. For the purposes of this article we will assume a UK resident has decided to set up a C Corporation. We will also assume that the subsidiary has no “presence” in multiple states.

Business location is one of the most difficult choices you will make when choosing your principle place of business in the US.

The sheer size of the country makes it difficult to find a state which meets the needs of your customers and provides a strong labour pool for your business – throwing into the mix that each State has its own laws and taxes produces quite a conundrum.

I could write several articles on this subject but have decided to focus on taxes as this is a real cost and cash flow which must be quantified (please note I am not covering more complex areas such as the sales tax differences between B2B and B2C sales, destination versus origin states and multi-state presence).

There are several state taxes which you need to be aware of which affect your company and your employees:

All of these taxes need to be considered as they ultimately affect the bottom line and your cost of employment.

Tax variations across states can be significant and the degree they will impact your company also depends on the type of business you are setting up.

As an indicative document, I find the Tax Foundation’s State Business Tax Climate Index to be very useful. This index ranks each state’s tax burden in totality and also by “tax type”.

The 2019 study (based on 2017 information) found the overall top (best) 5 states to be:

  1. Wyoming
  2. Alaska
  3. South Dakota
  4. Florida
  5. Montana

Wyoming and South Dakota also ranked first on corporate taxes and individual taxes when considered in isolation.

The worst 5 states were:

Looking at state corporate tax alone, a company with $1M of taxable profits would pay no tax in Wyoming versus a tax bill of $90K in New Jersey – a significant saving.

Individual tax is complicated by salary rates across states (and skills) but, again, Wyoming has no state income tax versus New Jersey’s tax rates of between 1.4% and 5.5% for earnings of up to $75K.

So does this mean you should set up your headquarters in Wyoming?

Probably not – unless you have a compelling reason to do so. Wyoming has a population of fewer than 600,000 people and a very low population density with only 2 cities having a population over 50,000 people. Wyoming is also considering the introduction of a state corporation tax (despite a failure earlier this year).

Nevertheless it is imperative you think carefully about state taxes before establishing operations in a state.

I have significant experience in the state of Florida which is ranked 4th and benefits from:

In our previous example, at least $40K would be saved in taxation which could be distributed to the owners of the business or reinvested in growth.

Florida has obvious labour challenges:

These challenges are easier to overcome if you are a low skilled business but even a manufacturer in Florida has a skilled labour force with over 14,000 manufacturers employing over 329,000 people – it also has a Chamber of Commerce which is actively seeking high skilled UK companies to invest in the State.

All US states have similar challenges.

Summary

As part of your wider business considerations ensure you measure the tax impact when choosing your principal US state of business. Remember high taxes = lower cash and lower distributable reserves.

It is imperative you consider both corporate taxes (which are applied to the bottom line) and income taxes (which affect your employees and elevate salaries). After this consider sales, property and unemployment insurance taxes.

Mark Marsh ACA

Previous articles can be found here.

Mark Marsh has over 13 years experience managing the finance and administrative functions of US subsidiaries.