It’s been a year of changing dynamics for Canada-US trade. NAFTA renegotiations have dominated headlines in recent months, and now that the new USMCA agreement has been signed, it’s time to revisit a lesser-reported piece of legislation that has pressing implications for Canadian tech companies.
If your company sells to US customers, like many Canadian companies do, then this ruling may affect your business.
You’ve probably heard by now that on June 21, 2018, the United States Supreme Court delivered the South Dakota v. Wayfair decision—one that could significantly change the way Canadian companies do business with US customers. In short, US states can now obligate companies to collect sales tax when selling goods or providing certain services to US customers while operating out of state, even if they have no in-state physical presence. The decision comes after mounting resistance in recent years against the Quill Corp. v. North Dakota decision, which made physical presence a requirement for states to collect sales tax from out of state vendors. Not every state has passed laws similar to South Dakota yet— but it is just a matter of time for the floodgates to open for further changes.
The immediate consequence of this ruling is obvious: Canadian technology companies may no longer enjoy any price advantages from not having to charge US sales tax compared to brick-and-mortar outlets, which has been a point of contention over the years. Companies far and wide could find themselves newly accountable for state sales taxes, and must prepare accordingly to keep doing business as smoothly as possible.
You don’t know what you don’t know: clearing up misconceptions about WayFair
The first common misconception is that the ruling applies only to US companies. In fact, any company that sells goods or provides certain services to US residents may be affected, regardless of location. The second misconception is that the decision will only affect online retailers—it cuts across all industries, including software-as-a-service (SaaS) and consulting companies.
The takeaway here is that if your company sells to US customers, like many Canadian companies do, then this ruling may affect your business.
How does this change sales tax accountability?
Before a state can require a company to collect and remit sales tax, the company must have a “nexus”: the minimum level of connection a company must have with a state. Pre-Wayfair, a company needed to have a physical presence in the state, such as through an office, warehouse, or employees travelling to meet customers, for a nexus to be established.
Now, physical presence is not the only standard that determines whether a company is required to register and collect sales tax. Additional standards for establishing sales tax nexus now include either minimum gross sales, or a minimum number of sales transactions, with customers in the state. These thresholds vary on a state-by-state basis. Essentially, the Wayfair decision has given all states greater powers to impose sales tax responsibilities on companies that do business virtually.
Let’s say you own a SaaS company that’s based in Canada, and only transact with US clients remotely. Before the Wayfair decision, as long as your SaaS company did not have physical presence in a given state, you wouldn’t have been required to collect and remit US sales taxes. Now, your sales tax responsibilities in each state all come down to your sales numbers, and it’s at the discretion of state thresholds whether or not you’re accountable.
Canadian ecommerce platforms and SaaS vendors are among the many types of businesses dealing with US customers that could establish sales tax nexus in US states as a result of the Wayfair decision. These Canadian businesses could now face US sales tax registration, collection, and remittance responsibilities, as well as compliance requirements under state law.
Navigating the new tax landscape
The potential for increased tax costs and record-keeping requirements may seem like a burden to Canadian companies. However, this is also an incentive to sharpen your operations and do smarter business in what might be your largest market. The companies that educate themselves and take the necessary preparations will be better positioned to stay competitive and thrive in these changing economic circumstances.
At PwC, we care about seeing Canadian businesses succeed. We want to see our companies make the best of sales tax changes, and we understand that providing actionable advice is the best way to help businesses steer through any resulting complications.
Navigating Wayfair means knowing the rules of sales tax, and adapting your business to follow suit. We’ve prepared some tips for Canadian companies:
The seller’s guide to Wayfair
The taxability of goods and services varies between states—for example, sales subject to tax in New York are not subject to sales tax in Oregon.
- Accountable means accountable—if you don’t properly collect sales tax from US customers and remit to the state, you’ll pay it out of pocket
- Officers of Canadian companies may be held personally liable for unpaid US sales taxes, so it’s really in your best interest to do things by the book
- The Canada-US Treaty doesn’t provide any relief for sales tax, nor can you claim a Canadian foreign credit for it
Smart steps forward
- Get to know each state’s sales thresholds, and keep an eye on any changes
- Be aware of your individual revenue streams and the sales taxability of each product and service you sell to US customers
- Take a close look at your compliance requirements, and seek out accounting plugins and tools that can help to better manage them
Of course, the impact from this ruling is still new, and many of the pieces are still being put in place. It’s a fluid situation that will give businesses a lot to think about, and so it’s only natural to wonder how best to approach the new tax requirements. You may already be well-positioned to handle any new tax obligations—it’s just a matter of figuring out what those obligations are.
We’re here to help you take the steps you need to best prepare for any changes in your tax accountability and to become fully compliant. Get in touch with me directly at rich.adam@pwc.com.
This article was originally posted on PwC Canada.