1.) Assuming that my US web servers don't perform ANY e-commerce (meaning all shopping cart/checkout/purchasing activities happen on the server in the foreign country), and all US servers act solely as advertising and web browsing servers displaying the products, can these US servers establish tax nexus in the US for my foreign company (or Arizona or Texas state tax)?

A: Gain on sale of inventory is sourced to the place where title to the property changes hands. IRC 862(a)(6). If your U.S.-based webserver completes the transaction, then arguably that is the place where title passes. However, having a physical facility in the USA shifts the balance against you, because the IRS can find that you are actually engaged in a trade or business inside the USA. So, this scenario does not work, in my opinion.

2.) What if I/our stockholders started a new Arizona/Texas advertising affiliate corporation called ABCAdvertising (not in any way related to my other foreign company), which sold advertising and web services to my foreign company to host the web page and display the products,...In this case ABCAdvertising would actually produce US taxable income that did establish nexus in the US. This way, the foreign company wouldn't actually own the web servers in the US... Will the foreign company be safe from creating nexus in the US/Arizona/Texas (safe from owing the US fed gov and the states of Arizona/Texas any tax money on purchases of its products)?

A: This works, if you are merely buying advertising services from the third party. But, you can't take orders from the U.S.-based system -- you would have to redirect the user to the foreign webserver to actually purchase anything advertised, so that title to the goods transfers outside of the USA.

Hope this helps.

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The key here is, in my opinion, different than what you are considering. My original answer concerns "tangible" personal property. For federal tax purposes, the source of income is the place where title transfers. This is a somewhat elusive concept, because most of the time, tangible personal property doesn't have "title" (except for motor vehicles) -- so the default source location is the place where "possession" transfers (i.e., final delivery). You can change this outcome by specifying in your contract that title to the property transfers at the point of sale. This means that if you are storing a "canned" software package in the USA, and title passes at your location in a foreign country, then it also means that at the instant the customer pays, he/she owns the product located in your storage facility. It also means that the customer is liable for shipment and any damage caused to the product.

Most customers are uncomfortable with this scenario, assuming they understand it. And, in practically every case, for domestic purposes, title to personal property (e.g., Amazon.com type sale) passes when the product reaches the customer -- and the customer can reject the purchase upon receipt by telling UPS to retrieve the product and return it to the vendor.

So, while you can accomplish the goal of avoiding federal taxation on the income by sourcing a tangible personal property sale from outside of the USA, as a practical matter it may be difficult to accomplish from a customer service viewpoint.

Concerning personal services, the income source is the location of the seller. However, where "communications" income is derived, the tax is divided 50/50 between U.S. and foreign source. Also, IRS regulations attempt to distinguish between sales and production activities -- i.e., if a sale takes place in the USA, but production takes place outside, then income accruing to the sales activity is considered U.S. source income.

The point here is that you need a succinct argument that you can defend with accounting evidence, if you are challenged. There is no bright-line rule here.

For more info, see Treas. Reg. 1.862-1 through 1.864-8t (scroll down).

Hope this helps.

NOTICE: My goal here is to entertain while educating the public about the law. I hope my answer is useful and informative to you. During our conversation, the website may ask you to rate my answer. If you rate my answer lower than the middle rating, then the website retains your entire payment, and I receive nothing. It is entirely your choice as to how you rate my answer. However, because your payment to me is in the nature of a donation/gift, rather than as compensation for any services rendered, you are entitled to know how your rating affects the final distribution of your donation.

If you need to contact me again, please put my user id at the beginning of your question ("To Socrateaser"), and the system will send me an alert. Please Click the following link for IMPORTANT LEGAL INFORMATION. Thanks and best wishes!