Tax authorities becoming frustrated with lost sales tax revenue and the inequities created by failing to adequately address e-commerce and remote sellers is not a new phenomenon, but two notable developments during the first half of 2018 are poised to have a dramatic impact on Canadian organizations with sales to jurisdictions in which they might have no physical presence.
The frustration on the part of tax authorities is understandable. Legislation drafted to ensure the collection of sales tax on goods and services supplied by traditional means has proven largely ineffective in the so-called “Internet age”, when vendors can sell directly to consumers without ever setting foot in that customer’s country of residence – never the mind province, state or other local tax jurisdiction. And even when the legislation has been updated to reflect modern economic reality, legal challenges to its validity and enforcement have been ongoing issues.
The primary issues arise out of an out-of-jurisdiction or “remote” seller’s ability to deliver taxable items to consumers in a particular jurisdiction without any legal requirement to register for or collect the applicable sales tax. This activity results in lost revenue for the jurisdiction, since it is next to impossible to compel consumers to voluntarily remit or self-assess any uncollected tax, and provides a distinct competitive advantage for unregistered, non-resident suppliers over businesses within the jurisdiction that are required to collect tax from customers.
These issues are particularly acute with the supply of digital content over the Internet, with many jurisdictions having already imposed or looking to introduce a so-called “Netflix” tax. However, lost revenue and competitive imbalance are not limited to supplies of intangibles and services. Similar problems can occur with supplies of goods that do not cross an international or physical border where any applicable tax is collected by the destination jurisdiction.
For further discussion on the origin of these issues, and how many jurisdictions are trying to address the situation, please see “How the Digital World has Transformed the Tax World”, Ryan Sales Tax Review, June 2017, Volume XXVIII, Issue 2, available at: Ryan Sales Tax Review | June 2017.
Québec Sales Tax
In its 2018 provincial budget, Québec announced that it will forge ahead with its own plan to counteract the detrimental effects of remote selling in the province, despite the federal government’s reluctance to address the concern. The proposed legislation, to be introduced later this year, will require certain non-resident suppliers of intangible personal property, tangible personal property and services to register for and collect Québec Sales Tax (QST) under a new specified registration system, starting in 2019. The new rules will impact suppliers of intangible personal property and services in Québec, which do not have a physical or other significant presence in the province, as well as non-residents of Québec located in Canada that make taxable supplies of goods in the province to persons reasonably considered to be consumers, subject to a threshold of $30,000 in taxable supplies. For more information on this impending change, please see Ryan’s analysis at: Ryan Tax Developments.
U.S. State Sales and Use Tax
To further complicate matters for Canadian companies that make sales in the United States, that country’s Supreme Court recently ruled in favour of the tax authority in South Dakota v. Wayfair, upholding a law requiring certain remote sellers of taxable goods and services to collect sales tax from their customers in South Dakota, even if the seller does not have a physical presence in that state. In overturning two longstanding precedents that established a physical presence requirement for sales tax registration and collection, this decision appears to have paved the way for other jurisdictions in the United States to impose sales and use tax compliance requirements on remote sellers.
While it remains to be seen how many jurisdictions will enact similar legislation to create compliance obligations and how aggressively each jurisdiction will pursue remote sellers, it seems likely that the sales and use tax compliance burden will increase significantly for many Canadian organizations with business activities in the United States.
For full coverage on this significant development in U.S. state sales and use tax, including the potential impact on Canadian organizations, check out the Ryan Canada website at: http://ryan.com/canada/wayfair/.
Need more information? Call the Ryan TaxDirectTM line at 1.800.667.1600 or visit: Ryan Canada TaxDirect.