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Do I Need To Worry About Collecting and Remitting Sales/Use Tax When I Sell to US Customers? By Juroviesky & Ricci LLP Jan 11, 2005
Quick Answer: Most Canadian businesses that sell to US customers either directly, through agents, and/or through their US subsidiary/business, will likely need to comply with sales/use tax rules of one or more states. Reliance on sales and use tax revenue in the United States is critical to the individual state’s fiscal goals. Currently, more than 90% of the individual states in the US, and approximately 7000 local jurisdictions impose a sales and/or use tax. Unfortunately for Canadian businesses, the sales and use taxes imposed by the different jurisdictions in the United States vary with respect to the following factors: What is a Sales Tax? In general terms, a SALES tax is a transaction tax imposed in intrastate retail transactions, and normally calculated as a percentage of the purchase price of taxable goods and/or services. What is a Use Tax? As a supplement and compliment to the sales tax, a USE tax is imposed upon the privilege of ownership, possession, use, storage, or consumption of tangible personal property or taxable services in a particular state, to the extent a sales tax would have been imposed on similar property or services if the property was purchased from a vendor in that state. In other words, a use tax is imposed to prevent residents from engaging in “jurisdiction shopping” to avoid a sales tax on transactions that would have otherwise been taxable, if the transaction occurred intrastate. Who has the obligation to collect and remit a USE tax? Purchasers subject to a use tax are generally required to “self assess” a use tax liability and remit the appropriate amount to the state and/or local jurisdiction. However, this is generally not preferred by the taxing jurisdiction simply because a “self assessment” of a use tax [after a taxable item or service is purchased] is unlikely. As such, the state and/or local taxing authorities prefer to impose a use tax collection and remittance obligation on the out-of-state seller directly. In other words, unlike an income tax, a sales and use tax can make the seller an agent of the state, obligated to collect the tax from the consumer at the point of sale and then pay it over to the taxing entity. How can they do this? The term used to describe an out-of-state seller’s connection to a state or local jurisdiction, such that the taxing jurisdiction can impose a use tax collection and remittance obligation on the seller, is called “nexus”. As mentioned above, every state and/or local taxing jurisdiction in the US differs as to what causes an out-of-state seller (i.e., a Canadian business) to have “nexus” with that jurisdiction such that a collection and remittance obligation is created. What is the bottom line? If a state and/or local taxing jurisdiction can connect you, the seller, to it in some way (i.e., if the Canadian business has “nexus” with the state and/or local taxing jurisdiction), the taxing authorities can obligate you, the seller, to file the required sales tax forms and, if warranted, collect and remit its sales tax on your goods and services to the US customer. Are all goods and services sales “taxable”? The answer is NO. Only certain goods and/or services are subject to a taxing authority’s sales tax. The issue with this is that every state and/or local taxing authority differs as to “what is taxable”. For example, some states may apply a sales tax rate to candy and exempt (from the sales tax) food. Thus, in this state, you must understand the definition of “candy” in order to determine if your item falls under the “food” category (i.e., exempt from the sales tax) or whether it falls under the “candy” category (and thus, subject to the sales tax). Another example is software sales. States may tax “off the shelf” type software, and exempt “custom” software. The issue that arises is the definition of “custom” software. If your software product comes under “custom” software, and that particular tax jurisdiction exempts “custom” software, your software sales should not be subject to the jurisdiction’s sales tax. Other issues with software include, maintenance contracts (mandatory and optional), telephone support, educational materials, training services, delivery charges, tangible media v. electronic delivery v. access to software, sales v. leases, etc. As stated above, all state and local jurisdictions may differ on the sales taxability of these products and/or services. How can these sales/use tax rules affect my Canadian business? Assuming a connection (i.e., nexus) exists with the taxing authority, if your business sells taxable goods and/or services to US customers, a sales/use tax on those goods/services represents a “flow through” tax, in that, you (as seller) would collect the tax on the sale from the buyer and remit what you collected to the relevant taxing authority. However, if you do not collect and remit the sales tax, and this is discovered after the fact (i.e., after the sale takes place), the tax (along with potential interest and/or penalties) can become an out-of-pocket tax to you, the vendor.
This is practically the case because it is highly unlikely that you, as seller, can go to your customer after the sale is final and successfully collect a sales tax that you did not originally collect. What are some of the common situations of why Canadian Businesses get discovered by a particular jurisdiction? In many situations, it is not necessarily the activities of the Canadian seller that bring a sales tax violation to the attention of state and/or local tax authorities. Rather, it is the existence of the in-state customer. For example, if the in-state customer is audited by a taxing authority, and questions arise as to the sales taxability, and collection and remittances of sales taxes, on certain purchases, the Canadian business (i.e., seller) may be forced to interface with the state and local taxing authority. For Canadian businesses that sell to US customers, in order to avoid unnecessary unpaid tax assessments, penalties, and/or interest, you should considering consulting with a US tax advisor on, at the very least, the following matters: In conclusion, when selling to US customers, you should always comply with US federal, state, and local tax rules. One of the bodies of US tax rules that should not be overlooked is the US sales/use tax. Although complying with sales/use taxes can be a daunting administrative task, if proper advice is sought, it will lead to less exposure and may even provide your business with undiscovered opportunities. © Copyright 2006 Juroviesky & Ricci LLP. All Rights Reserved. www.jruslaw.com |