So, let's assume I have an LLC formed in a state that doesn't require me to live in it (e.g. Nevada). I sell my product online and one of my customers, whose permanent residence is in state X, bought it. My understanding of foreign qualification is that:
0) If the laws of state X require me to pay it sales tax, I then need to foreign qualify in that state.
1) The point of foreign qualification is so you can pay the sales tax you owe to a state your business doesn't reside in.
2) Even if I don't have to foreign qualify in a state, I may still owe it income taxes, if I sell to people who reside in it.
Is this general understanding correct?
This understanding is not correct. Qualifying an entity (an LLC, in this case) depends on if you are doing business in that state. State tax is a separate from qualification. You are right that you may owe sales taxes if you sell to people in that state, depending on the circumstances.
Qualification is the requirement that your entity is qualified in that state if it is doing in the state. Doing business is usually having employees, offices, taking orders in the particular state.
This answer is for informational purposes only and is not legal advice regarding your question and does not establish an attorney-client relationship.
While Mr. Murillo is generally correct, his response is incomplete.
First, the general rule is that, if you are conducting *intrastate* business in a state, you have to qualify in that state -- which (at least in California) means filing a statement of information and paying an annual fee. Under your hypothetical, you exclusively are conducting *interstate* business and therefore should not need to qualify in State X.
Second, the general rule in jurisdictions imposing a sales tax is that the *customer* is responsible for paying the tax, but for convenience, the vendor is obliged to collect the tax from the customer and remit it to the relevant state agency.
Third, as to income tax, your LLC may be a taxpayer or a pass-though entity (like a partnership) where the income taxes are payable by the member(s) of the LLC. If your LLC is a quasi-domestic entity under the law of the state where it's business offices are located, and it is a taxpayer, it would be liable for state income tax as if it were organized there instead of Nevada.
CAVEAT: I am not a tax lawyer, just an issue-spotter. Consult with your accountant or tax counsel for a definitive answer to your questions.
Disclaimer: This answer is provided as a courtesy. This response does not constitute legal advice, which requires an attorney-client relationship, and this response does not create an attorney-client relationship between us. It is impossible to properly evaluate a legal problem without a detailed consultation and a comprehensive review of all the facts, documents, and/or other materials involved. In addition, if you are in a state other than California (where I am admitted to practice), your state may have different laws. You therefore should not rely on this answer, but should consult with local counsel for definitive guidance.
With all due respect, your understanding is not correct in several respects; if you're doing business in this fashion - or in any other fashion - then you really need to get competent advice immediately, before you get yourself into a world of tax trouble.
That being said, as a general matter, an LLC formed in State A is only required to qualify to do business in State B if, in fact, the LLC is doing business within State B. As a general matter - and subject to numerous exceptions, so you can in no way rely on my answer as satisfying your situation - an LLC formed in State A cannot be required to qualify to do business in State B merely because the LLC made an online sale to a customer who resides in State B.
Furthermore, under Supreme Court precedent, State B cannot force a State A LLC to collect State B sales tax unless that LLC has some sort of physical contact with State B, such as having employees or agents in State B. State B also cannot force the LLC to pay State B income tax on the income earned from the online sale to the customer who resides in State B so long as the LLC has no other contacts with State B.
The only thing I will say that I believe you can rely on is that the issues relating to interstate taxation of businesses are complicated and there is no one set answer because it mostly depends on which states are involved, the sort of business being done, and a whole host of other facts and circumstances and that therefore you really need to consult directly with competent tax counsel rather than trying to get the answer for free online.
Finally, with respect to sales taxes: they are generally imposed on the transaction itself, the buyer is expected to bear the economic cost of the tax - that is why, generally speaking, retail prices must be advertised exclusive of any sales tax and the sales tax itself must be separately stated on the receipt given to the customer - but even so, the burden of collection is placed on the seller and, as a practical matter, it is the seller who "pays" the tax because she or he must give the state enough money to cover the tax due on all of her or his taxable sales, regardless of whether the seller actually collected those taxes from the buyer. The nominal incidence of a tax rarely corresponds to the economic incidence of the tax.
Years licensed, work experience, educationLegal community recognition
Peer endorsements, associations, awardsLegal thought leadership
Publications, speaking engagementsDiscipline