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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22649
Experience:  Taxes, Immigration, Labor Relations
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When Ukrainian contractors come to Rhode Island to do 2-3 week

Resolved Question:

When Ukrainian contractors come to Rhode Island to do 2-3 week consulting, what tax nexus might apply? The Ukrainian contractors (UACO) are working for a Ukrainian (UALLC) company, that is contracted by a US company (USINC) to provide services to a Business client in Rhode Island (USCL). Let's say that the numbers are the following:
- paid from USINC to USCL during year for all work: $432,000
- paid from USINC to USCL for 6 weeks work on site in RI : $66,000
- paid from USCL to UALLC during year for all work: $210,000
- paid from USCL to UALLC for 6 weeks work on site in RI: $30,000
- paid from UALLC to UACO during year for all work: $175,000
- paid from UALLC to UACO for 6 weeks work on site in RI: $55,000

What state taxes might apply here?
- Sales tax?
- Income tax?
- Who has to withhold taxes or pay taxes?
- What forms have to be filed? How often do they need to be filed?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
When the actual work (services) are provided in the US - the compensation for that work is considered from US sources - and as such taxable for the provider.

LEV :

If your cases - services are provided by the Ukrainian (UALLC) company - and that company must be registered with the the IRS - and assuming that is a corporation - it will need to file from 1120F - and will be liable for federal income taxes on net business income.
If Ukrainian contractors are independent contractors - and assuming they provided services for the Ukrainian (UALLC) company and services are provided in the US - their compensation is subject of US income tax regulations - and should be reported as taxable income. Assuming Ukrainian contractors are nonresident aliens - they will file individual income tax returns using form 1040NR.

Customer:

Ok, we're talking about state taxes right?

LEV :

Please be aware that there is the US-Ukraine tax treaty in effect which overrides some tax law provisions.
Here is the document - www.irs.gov/pub/irs-trty/ukrain.pdf‎

Customer:

How much taxes would apply in this case?
Who has to pay or who has to withhold?

LEV :

It is optional to claim tax treaty benefits - so if not claimed - the general tax law mentioned above will be in effect.
To claim tax treaty benefits - special tax forms must be filed with the IRS.
In particular - the tax treaty allows to exclude business profit from taxable income as long as a resident of a Contracting State doesn't have a permanent establishment.
Please see page 10 - article 7.

LEV :

If you perform personal services as an independent contractor (rather than an employee) and you can claim an exemption from withholding on that personal service income because of a tax treaty, submit Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual , to each withholding agent from whom amounts will be received.

LEV :

So far - based on your information - both - the Ukrainian corporation and Ukrainian contractors are eligible to claim tax treaty benefits - and if they do so - compensation is not subject of federal income tax and not subject of mandatory withholding.

LEV :

Rhode Island state income tax - is a separate issue - assuming services were provided within the state - the compensation is subject of state income tax.
You will find corporate and individual income tax forms here - http://www.tax.ri.gov/taxforms/
Individual tax rates vary depending on the total income - and are between 3.75% and 5.99% - (rates were reduced starting 2011).

Customer:

So for the state income tax, who needs to pay / withhold it?

LEV :

There is a mandatory withholding from payments to nonresidents - see here - http://www.tax.ri.gov/regulations/salestax/91-27.php


Any individual, partnership, joint venture, corporation, state, municipal government or exempt organization awarding a construction contract in Rhode Island to a nonresident contractor (as hereinafter defined) is required, pursuant to Section 44-l-6 of the General Laws, as last amended, to withhold 3% of the contract price to secure payment of any sales and use tax or income tax withheld, or both, that may be due to the State of Rhode Island in carrying out the contract.

LEV :

Sales taxes are regulated on the state level.
First - you need to determine if your sales are subject of sales tax. Rhode Island's sales tax rate is 7%
This publication provides information about taxable and not taxable sales - as related to RI sales tax regulations - http://www.tax.ri.gov/streamlined/2012/RI%20Taxability%20Matrix%203.7.13.pdf
If you find that your sales are subject of sales tax - sales taxes must be separate invoiced and paid by the customer. The seller will collect sales taxes and remit to taxing authorities.

Customer:

Isn't sales tax usually related to 'tangible personal property'?

Customer:

Our contractors providing programming services / consulting work. Results are usually delivered on the cloud, so not on a physical storage device on location of the client.

LEV :

Isn't sales tax usually related to 'tangible personal property'?
That is correct - sales taxes are usually applied to sales of tangible properties. However, some services are also subject of sales tax.
Our contractors providing programming services / consulting work. Results are usually delivered on the cloud, so not on a physical storage device on location of the client.
I am not sure if you had a chance to review the document I referenced - http://www.tax.ri.gov/streamlined/2012/RI%20Taxability%20Matrix%203.7.13.pdf
If services are provided with RI - they might be subject of sales tax.
Some information services are subject of sales tax - for instance - mandatory computer software maintenance contracts with respect to pre-written computer software - are subject of sales taxes.
However - - mandatory computer software maintenance contracts with respect to non pre-written computer software (custom) - are NOT subject of sales taxes.

Customer:

Ok, then we're exempt, because we write custom non-pre-written software

LEV :

If your services are not subject of sales taxes - no need to charge sales taxes from customers.

Customer:

About the state tax - there is no possible exemption from it right? Even with the tax treaty benefits between Ukraine and US?

Customer:

And the USINC that will have to withhold taxes, they require a W-8BEN form from the UALLC right?
Does the UALLC have to obtain a US taxpayer identitication number? If yes, what kind of number?

LEV :

About the state tax - there is no possible exemption from it right? Even with the tax treaty benefits between Ukraine and US?
The tax treaty affects ONLY federal taxes - that is an agreement between countries.
States have their own tax law and regulations. As long as services physically were provided within state boundaries - these transactions are regulated by the state.

LEV :

And the USINC that will have to withhold taxes, they require a W-8BEN form from the UALLC right?
Does the UALLC have to obtain a US taxpayer identification number? If yes, what kind of number?
If payments are not subject of taxes - the tax ID is not required. However - because payments are subject of state income tax - you need to have the tax ID for that purposes.
For individuals - that would be ITIN, and for the business entity - EIN.
You will find detailed information here including application procedures - http://www.irs.gov/Individuals/International-Taxpayers/Taxpayer-Identification-Numbers-(TIN)

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22649
Experience: Taxes, Immigration, Labor Relations
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