Foreign Manufacturers: Traps for the Unwary

The legal complexities of selling and servicing machinery in the U.S.

Foreign manufacturers who sell industrial machinery and equipment in the U.S., if they provide installation and repair services to their U.S. customers, face potentially unforeseen legal consequences with regard to visas, federal and state taxes, and local licensing laws. We discuss the steps foreign manufacturers should take to protect themselves and their employees.

Do I need a visa?

Citizens of many foreign countries, including most European citizens, may travel as tourists or on business under the U.S. Visa Waiver Program without any formal visa application, and only registration under the Electronic System for Travel Authorization (ESTA) is required. Under the program, a European executive may visit a corporate subsidiary or attend a trade fair. Similarly, when specifically required by the purchase contract, technical experts who have to travel to the United States to install, service or repair equipment or machinery sold by a foreign company to a U.S. buyer can travel under the Visa Waiver Program. Travel for technicians and engineers installing foreign-made equipment in the United States is limited to a maximum of 90 days per stay and has to be in performance of a contract of sale of foreign equipment to the United States requiring installation (or repair service under warranty) at the customer site. The installation cannot include construction work, except for supervision or training of U.S. workers to perform construction. If the technician sent to the United States is not eligible under the Visa Waiver Program, a visitor’s visa (B visa) would be required. If the 90-day time limit (or 180-day time limit plus possible extension under a B visa) is exceeded, or if any of the other criteria of the program are not met, work authorization has to be secured, typically in the form of an E visa, L visa or H visa. The application process for those types of visa is more complex, and assistance from an experienced immigration attorney is recommended.

Tax issues

Frequently, the income tax consequences, particularly at the state level, of installation of equipment by a foreign manufacturer are not appreciated. Prevailing tax law in the United States provides for two distinct levels of income taxation. First, gainful activities are subject to federal income taxation. In addition, each of the 50 states maintains its own tax regime, with most states levying income tax on a state-by-state basis with often diverging tax laws and regulations. Furthermore, a few cities and municipalities (most notably, New York City) levy an additional, third level of income taxation. Since most industrialized countries have double-taxation treaties with the U.S., the definition of maintaining a fixed place of business, or “permanent establishment,” is provided under those treaties. Article V of the U.S.-German Income Tax Treaty provides that maintaining a construction site in excess of 12 months constitutes a “permanent establishment,” which subjects the foreign manufacturer to U.S. federal income taxation because it is deemed to maintain a branch. However, even if the installation is performed in less than 12 months, many U.S. states mandate far narrower definitions of what constitutes “nexus,” i.e., maintaining sufficient business contacts, resulting in state income taxation. Under those provisions, even very short installation services, storing or using personal property such as tools and other items, or engaging in maintenance work may constitute nexus and thus subject the unwary foreign manufacturer to state income taxation. Thus, state tax rules should be carefully reviewed prior to engaging in business activities. Failure to file income tax returns when required can result in severe civil and even criminal penalties.

Who needs a contractor’s license?

Most states require a contractor’s license for commercial, industrial or residential construction projects. Some states only require licenses where projects exceed a specified dollar amount. The requirement for a contractor’s license applies to both individual and entity contractors. For foreign manufacturers with U.S. subsidiaries, it is important that the proper entity is licensed. For example, if the foreign parent company is the party to the manufacturing contract, the foreign parent company must be licensed at the time the contract is entered into and the legal obligation is created. The foreign manufacturer should also ensure that two or more of its employees performing the work carry a contractor’s license, if the state licensing board so allows.

How to obtain a contractor’s license

  • Generally, contractors may obtain licenses through a state licensing board. Nearly all of the states require applicants to be at least 18 years of age with a high school diploma or equivalent; provide proof of U.S. citizenship, legal residency or lawful presence in the U.S.; provide documentation of any other occupational license the applicant holds in the state; and explain any citations, violations or liens resulting from previous construction work. If the applicant is a corporation, it must register with the Secretary of State to do business in the state.
  • Most states also require license applicants to take a written examination on construction law, business organization and the skills of their occupation. These exams may be difficult for foreign applicants, as they generally require a good command of the English language and ask technical and legal questions.
  • Applicants may also have to prove financial ability to operate a construction business. Most states will also require proof of on-the-job experience, and may request letters of reference from previous employers and customers.
  • The taxing authority in each state has the right to set any conditions for doing business in that state, and many states will require licensed contractors to post a “state license bond,” which seeks to protect consumers who may be damaged as a result of defective construction or other license-law violations. The bond does not protect contractors from liability in the case of an accident on the job. Therefore, contractors must carry liability and worker’s compensation coverage in each state where they do business.
  • In addition to these state requirements, many counties and cities will require their own business or occupation licenses. For example, in New York, except for asbestos abatement work, all construction work is regulated at a local level. Holding a license in one state usually does not grant a contractor the right to perform construction in another state. Because licensing requirements vary from state to state, foreign manufacturers should consult the rules of the licensing board in the state in which they wish to do business. In addition, foreign manufacturers should also be aware of any county or city licensing requirements that apply.

The consequences of failing to obtain a contractor’s license

There are very serious consequences for the failure to obtain a contractor’s license. First, an unlicensed contractor will be unable to sue for payment in many states because proof of licensing is a prerequisite to bringing a lawsuit. Some states, such as Virginia, consider a contract with an unlicensed contractor to be void and unenforceable. Additionally, in the event the contractor is sued for unlicensed work, legal defenses such as waiver, estoppel or quantum meruit may be unavailable. Second, an unlicensed contractor may be forced to return all payments received for completed work. This is true even if the contractor fully disclosed that it was not licensed and the quality of the work completed was perfect. Finally, an unlicensed contractor may be liable for monetary fines and/or jail time. For example, in California, those who are found to be contracting without a license must appear before a Superior Court judge to answer misdemeanor charges that carry a potential sentence of up to six months in jail and/or a $5,000 fine in addition to an administrative fine of $200 to $15,000. If unlicensed contracting continues, the penalties become more severe: a second offense results in a mandatory 90-day jail sentence and fine of 20 percent of the contract price or $5,000.Because of the serious nature of these consequences, foreign manufacturers should ensure they are properly licensed in each state and municipality in which they do business.

Conclusion

The sale of industrial machinery and equipment into the U.S. raises a host of issues pertaining to visas, taxation, and state and local licensure. Foreign manufacturers wishing to sell such products in the United States should consult with competent legal counsel to ensure compliance with all laws applicable to the provision of installation and repair services.