50-State Sales Tax Compliance Guide
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Where Is Foreign Qualification Required for Sales Tax?

Businesses that conduct sales taxable activity in a given state are required to register for a state sales tax account with the department of revenue. Many times, registration with the secretary of state is also required. This process is known as foreign qualification. This article discusses when foreign qualification is required for sales tax.

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What Is Foreign Qualification?

“Foreign qualification” refers to registering your business with the secretary of state office of another state. It enables your company to legally pursue growth opportunities across state borders without having to incorporate a new business entity. It’s typically the first step in expanding a business to a new state.

During foreign qualification, a business registers with the secretary of state by filing information about its company, management, and business activities. Once the company’s application is approved, the secretary of state will issue a certificate of authority to do business within its borders.

Why Is Foreign Qualification Required?

Foreign qualification is required when a business begins transacting business in a state. Traditionally, transacting business is defined as having a physical presence, such as maintaining an office, warehouse, or employees in a state. Modern businesses may be considered doing business for economic reasons, such as a significant amount of commercial activity in a state.

Foreign qualification generally grants the business access to the court system to bring and defend against lawsuits. Foreign qualification may be required before the business can successfully open a tax account or obtain a license. Additionally, the business may need to show proof of foreign qualification when bidding on a contract, obtaining a loan, during due diligence in the context of mergers & acquisitions, and elsewhere.

For more information on the foreign qualification process, visit our 50-State Reference Chart.

Foreign Qualification and Sales Tax Registration

Many businesses believe that out-of-state sales by itself does not trigger the need to foreign qualify. Indeed, very few states require foreign qualification unconditionally as a prerequisite to sales tax registration.

Only five states specifically require businesses registering for sales tax to show proof of foreign qualification when submitting their application:

  • Alabama
  • Indiana
  • Kentucky
  • Missouri
  • New Hampshire

Some states have more complex rules. Seventeen states have income tax, franchise tax, or gross receipts tax that are affected by economic nexus threshold rules. In most states, income, franchise, and gross receipts tax accounts are created only when the business registers its entity with the secretary of state (e.g. through foreign qualification).

State Relevant Publication (if applicable)
Alabama https://revenue.alabama.gov/individual-corporate/faq/corporate-income-tax/
California https://www.ftb.ca.gov/file/business/doing-business-in-california.html
Colorado https://www.colorado.gov/pacific/sites/default/files/01.2020_CorporateIncomeTaxGuide.pdf
Connecticut https://portal.ct.gov/-/media/DRS/Publications/pubsip/2010/IP2010291pdf.pdf
Hawaii https://www.capitol.hawaii.gov/session2019/bills/SB495_HD1_.htm
Indiana http://iga.in.gov/legislative/2019/bills/senate/563#document-e4fbd379
Kentucky https://taxanswers.ky.gov/Income-Taxes/Pages/Corporation-and-Pass-Through-Entity-Taxes-FAQs.aspx
Massachusetts https://www.mass.gov/regulations/830-CMR-63391-corporate-nexus
Michigan https://www.michigan.gov/taxes/
New York https://www.tax.ny.gov/bus/ct/corp_tax_reform_faqs.htm
Ohio None
Oregon https://olis.leg.state.or.us/liz/2019R1/Downloads/MeasureDocument/HB3427/Enrolled
Pennsylvania https://www.revenue.pa.gov/GeneralTaxInformation/TaxLawPoliciesBulletinsNotices/TaxBulletins/CT/Documents/ct_bulletin_2019-04.pdf
Tennessee https://www.tn.gov/content/dam/tn/revenue/documents/taxguides/bustaxguide.pdf
Texas https://texreg.sos.state.tx.us/public/readtac$ext.TacPage?sl=R&app=9&p_dir=&p_rloc=&p_tloc=&p_ploc=&pg=1&p_tac=&ti=34&pt=1&ch=3&rl=586
Utah https://tax.utah.gov/forms/pubs/pub-37.pdf
Virginia https://www.tax.virginia.gov/laws-rules-decisions/rulings-tax-commissioner/19-2

Even if a state does not require foreign qualification as a prerequisite specifically to registering for state taxes, it may need to foreign qualify based on some other amount of physical presence.

When Should a Business Foreign Qualify?

Businesses are generally required to foreign qualify before transacting business in a given state. Many states assess penalties for late registration that, with prior planning, are often avoidable. This raises the question of when a business is transacting business and when to submit an application for certificate of authority.

The answer varies by the business and what its current and future plans are in a state. Each business should review its out-of-state activities with its legal counsel or attorney. Then, the business should work proactively to submit the necessary documents with the secretary of state. Many agencies take weeks or months to approve foreign qualification applications.

Don’t let state registrations stand in the way of your growth. Harbor Compliance can foreign qualify your business as a service, even using local offices to achieve faster processing times. Learn more and order service here.

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