Changes to U.S. sales taxes can impact your business. Furthermore, the rules differ from state to state.
Quebec companies operating in the manufacturing, IT or distribution sector often have commercial ties with the U.S. Recent developments regarding U.S. sales tax laws can have a major impact on their operations–whether they have a physical presence in the U.S. or not.
Registration and fiscal obligations
In the U.S., sales taxes are mainly determined at the state level. Nearly all U.S. states have their own sales tax, with the only exceptions being New Hampshire, Oregon, Montana, Arkansas and Delaware (known as NOMAD).
In addition, states have authorized various local entities such as counties, cities, etc. to collect retail sales taxes. These local taxes are levied in the same way as state taxes, but increase the effective tax rate by a few percentage points. This means that the tax rates and rules vary greatly from state to state.
Physical or online presence?
When does a Canadian business selling in the U.S. need to worry about taxes? Traditionally, businesses that had a physical presence (e.g., a warehouse or subsidiary) in a particular state were required to collect and remit the applicable sales tax. However, e-commerce changed all this.
In the case of Wayfair v. South Dakota, in 2018 the U.S. Supreme Court ruled that states could require companies with no physical presence in the state to collect sales tax if they meet a certain sales or transactions threshold in the state. This paved the way for the concept of “economic nexus” in determining whether a business is required to collect sales tax in a given state.
Therefore, from now on Quebec businesses with online sales in the U.S. may be required to collect and remit sales taxes in a number of states due to their economic presence—even if they have no physical presence there. This means that cross-border tax compliance has become even more complex for a number of businesses.
It is also important to note that while the threshold is generally $100,000 in sales or more than 200 transactions per year1, each state has its own rules and thresholds for collecting sales tax. Even if, at first glance, a business exceeds the economic nexus threshold it may not always need to register for the purpose of collecting sales tax in a given U.S. state. Certain types of businesses or transactions could be excluded in calculating the threshold, such as sales for resale (e.g., a wholesaler that sells to resellers) or the sale of manufacturing or farming equipment, which would actually be exempt. In addition, specific rules in one state could exclude other situations, particularly if the business operations in this state are considered to be occasional or isolated. States can have specific thresholds to determine what is considered to be “occasional”.
Most U.S. states also have “marketplace” rules whereby a business selling products via website—like Amazon or Best Buy—is required to collect and remit sales tax even though, legally speaking, online sales websites would generally be considered to act as agents for their clients to facilitate sales. It should be noted that sales tax rules in the U.S. governing sales websites are constantly changing and may vary from state to state as well as depending on the particular situation.
1Some states, such as New York and California, have a higher threshold ($500,000 per year) while several others have an annual threshold of $250,000.
Collecting and remitting U.S. sales taxes
Once a seller is registered or has a registration requirement, it must collect the applicable sales taxes from its customers and remit the amounts to the tax authorities.
If a seller fails to report sales, there is generally no statute of limitations period and states can demand payment for the amount of sales taxes beyond the normal three to four years2.
It should be noted that the fact that a business is a registrant collecting sales tax does not increase the tax cost for its customers since they are required to self-assess and pay sales tax if the supplier has not collected the appropriate amount.
2Some states have a longer statute of limitations period. The rules vary from state to state.
How the U.S. sales tax system works
Unlike VAT systems, retail sales taxes generally apply only to tangible personal property—not to intangible assets or real property. Moreover, services are generally not subject to retail sales tax, with the exception of specifically identified services or those that are specifically related to tangible personal property.
It is important to note the treatment that applies depending on the type of assets sold.
1. Sales of tangible personal property
U.S. sales tax generally applies to sales of material goods such as merchandise and manufactured products. The applicable rules and rates vary depending on the state. Quebec businesses selling tangible personal property in the U.S. must take into account the tax rate that applies in each state and make sure that sales taxes are being properly calculated and collected.
2. Professional services
In most U.S. states, sales tax does not apply to professional services, such as advisory, accounting and IT services. However, there are some exceptions and these types of services are taxed in some jurisdictions. Exceptionally, some states tax most services other than those that have been specifically identified. Quebec businesses that provide professional services in the U.S. must check the rules in each state to determine whether sales tax applies.
3. Services relating to tangible personal property
Services relating to material goods, such as maintenance, repair or installation services, may be subject to sales tax in some states. The distinction between services and the sale of goods may sometimes be more subtle. Quebec businesses that provide services relating to tangible personal property need to assess the rules in each state to determine whether sales tax applies to their specific services.
A transaction may be exempt from sales tax for different reasons. Exemptions vary from state to state and, in some cases, are based on economic criteria in the region. For further information, please see our article on exemptions.
4. Software and data processing
U.S. states can treat software differently, regardless whether in physical or downloadable format. Some states consider software to constitute material goods to which sales tax applies, while for others software is a tax-exempt service.
Under the SaaS model, software as a service is delivered via the cloud. Customers access software via the Internet rather than installing it locally on their own device. The taxation of SaaS services varies from state to state. Some states consider SaaS services to be taxable and require sales tax to be collected, while for others SaaS is a non-taxable IT service. Determining where the SaaS services are being sold can also be a complex matter.
The PaaS model provides a platform allowing developers to create, host and deploy applications. The taxation of PaaS services can also vary. Some states consider PaaS services to be taxable since they involve use of an IT infrastructure. The PaaS model can also involve taxable services (e.g., hosting the application) in addition to non-taxable services (e.g., supplying development tools). These considerations, as well as the wide array of services that can be provided, including development, implementation, configuration and data migration, can make fiscal obligations more complex.
Data processing services are often taxable, although the definition of what constitutes a data processing service varies from state to state. Some U.S. states consider these services to be taxable and require sales tax to be collected, while others consider them to be non-taxable professional or IT services. It is extremely important to know the position taken by the particular state in order to determine whether the data processing services are subject to sales tax. Some states may have exemptions for professional or IT-related services. However, these exemptions may differ from state to state and vary according to the specific data processing services being provided.
Mastering the complexity of state rules
If you are developing the U.S. market in different states, you need to master the complexity of state tax rules. Since each state has its own taxation criteria and exemptions, tax compliance may be harder to achieve. It is important to act quickly and have good advisors.
Moreover, due to the complexity of U.S. tax rules, many businesses opt for automatic collection and remittance. Specialized software solutions can be helpful in ensuring that tax rates are calculated properly based on a customer’s location and generating accurate tax returns.
26 Sep 2023 | Written by :
Maryse Janelle is a partner at Raymond Chabot Grant Thornton. She is your expert in taxation for the...
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On September 21, 2023, the Department of Finance Canada tabled Bill C-56 proposing legislation to temporarily enhance the GST Rental Rebate for construction of specific rental housing. These measures will increase the GST Rental Rebate from 36% to 100%, and remove the phase-out thresholds for this type of housing.
Currently, for the construction of rental housing designated for long term rental, a partial rebate of 36% of the GST is provided for units valued at $350,000 or less. The rebate is on a sliding scale for homes valued between $350,000 and $450,000. The rebate does not apply to units valued at more than $450,000.
The Department proposes legislation amendments to increase the rebate rate from 36% to 100% for some rental housing. In addition, the phase-out thresholds will be removed. The rebate will apply to all rental housing, regardless of its value.
Public service bodies will also be able to access the increased rebate.
Service
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A successful sale involves a rigorous process. Abris CBI and Mégatex are two businesses that we have successfully supported—one step at a time.
Guided by our team of experienced professional advisors, Roger Guay, owner of Abris CBI and Mégatex, handed over the reins to a preferred buyer, confidently and serenely.
For over a decade, Roger has built up both his businesses, Abris CBI and Mégatex, based in Lévis and Québec City respectively. Abris CBI specializes in manufacturing temporary winter shelters as well as summer shelters and awnings. Mégatex designs, manufactures and distributes industrial tarps and nets for the construction, transportation and environment industries, among others.
When he turned sixty, the entrepreneur felt the need to slow down and considered selling one of his businesses. He initially called on our services to assist him with the sale of Abris CBI.
“The business was well positioned in its industry and, at the time, had around 15 employees. It was important for me to hand it over to a buyer who would continue to help it grow,” said Roger Guay.
Such a process can monopolize the attention of a business owner, who must also keep the business running smoothly. Thanks to our proven process, we know exactly what path to take to close an SME sale as quickly as possible. This means that the business owner can focus on running the business while we take care of the sale process.
Estimating business value
Working together with the owner of Abris CBI, we started by drawing a list of key criteria for setting a fair business sale price.
Typically, these criteria include, but are not limited to, physical assets, financial performance, market reputation, current employees, and the type and number of customers.
This is a delicate step. Entrepreneurs may have an emotional view of their business’s value that does not necessarily correspond to its actual financial value.
Financial and strategic analysis
After valuing the business, our experts carried out an in-depth financial analysis to identify the business’ strengths and weaknesses, gain a clear understanding of its growth prospects and define the best sale strategy. The objective was to maximize value for the seller while ensuring a fair transaction for the buyer.
Drafting a confidential information memorandum
We then drafted a comprehensive document containing all of the business’s relevant information, including details of operations, financials and target market. This document served as a presentation to potential buyers, enabling them to make an informed assessment of the proposal.
Searching for buyers
We maintain links with buyer networks. So, with the help of the business owner, we drew up a list of strategic potential buyers whom we then contacted. The aim was to find the best candidate, one who would appreciate the business’ mission and value.
Over 30 buyers expressed interest in Abris CBI. We selected the most promising ones and arranged to give them a confidential tour of the business. In the end, three buyers made an offer, which we submitted to Roger Guay.
Negotiating the terms of sale
Fully knowing the owner’s expectations and objectives, our experts subsequently negotiated the terms of the sale with the interested buyers. We act as the seller’s intermediary, looking after their interests and negotiating effectively and without compromise.
Overseeing the transaction
Once we had found the right buyer, we of course supported our client throughout the transaction. This very important step involves carefully scrutinizing the legal and financial aspects to ensure that everything is done by the book.
Coordinating the buyers’ financiers
To streamline the transaction, our experts coordinated communications among all stakeholders, including both parties’ bankers, lawyers and accountants. We also made sure that all shared documents accurately reflected the final agreement.
Supporting legal advisors
Thanks to our legal expertise, we were equipped to navigate the legal complexities of the sale process and thereby protect the seller by ensuring a smooth business transfer. The process took about four months.
“It all went smoothly,” said Roger Guay. “I was given two qualified buyers to choose from. The process was efficient and the result lived up to my expectations.”
The story didn’t end there. “I asked Dominic to estimate the value of my other business, Mégatex,” continued Mr Guay. “It turned out to be worth more than I had thought. The sale of Abris CBI had gone so well that I decided to sell Mégatex too. That was June 2021. The deal closed in late January of the following year.”
The process of selling an SME can be complex. Being properly supported is the key to a successful transaction.
25 Sep 2023 | Written by :
Dominic Chouinard is an expert in business sales and acquisitions at Raymond Chabot Grant Thornton....
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Technological innovation is a core component of modern businesses’ development strategy. Here’s how Savoura has made it a priority.
Savoura has made innovation the driving force behind its greenhouse production business. It has just invested $55 million in its largest project ever, in Sainte-Sophie, where it all began in 1995.
This nine-hectare greenhouse complex, the largest ever undertaken by the group, houses tomato production in state-of-the-art facilities designed to the highest environmental standards. This is just the beginning of its ongoing optimization drive.
We spoke to President and CEO Peggie Clermont about Savoura’s innovation approach.
Staying competitive and profitable
To stay profitable and adapt to market conditions, the business had to look at ways of optimizing its processes, and got all players involved in preparing and implementing a step-by-step action plan.
Peggie Clermont stresses the importance of maintaining a balance between the business’s competitiveness and high quality standards. In her words, “It’s crucial to stay competitive in our industry, but not at the expense of our product quality.”
Her words reflect her commitment to harnessing innovation to improve production processes, reduce costs and increase efficiency without compromising the quality of Savoura’s products.
Identifying priority needs
Innovation isn’t just about technology. It’s a state of mind, a way of approaching things. Peggie Clermont sees innovation as a continuous process, a way of “doing things differently” in all areas of a business, from research and development to sales and production. It’s not static—it’s in perpetual motion.
The organization, like the rest of the industry, is facing numerous challenges and must determine which priorities and solutions are most viable in the short, medium and long run.
Labour shortage
As in all markets, the labour shortage is one of the greatest challenges facing the agri-food industry. Although turning to foreign workers is one solution, it can’t be the only one.
Robotic process automation is one way forward. Savoura used to have a great deal of manual data and systems that didn’t interoperate. Centralizing information and automating administrative processes will enable the business to improve productivity.
What’s more, some tasks can be automated to free up employees for value-added tasks, where their expertise can be put to good use.
International competition
Food self-sufficiency comes at a cost. Savoura faces competition from places like Mexico, Ontario and California.
“Competition, particularly from Mexico, doesn’t play by the same rules or face the same issues we do,” says Peggie Clermont. Differences in environmental standards as well as employee compensation and well-being bring additional challenges.
This observation is a reminder of the need to optimize production to do more and do better with fewer employees and less energy, and thereby improve efficiency.
Energy constraints
Installation, maintenance and energy costs are key factors to consider. For example, because of our colder climate, it’s much more expensive to build a greenhouse here in Québec than in Mexico.
Incentive rates, subsidies and other government assistance programs can help make our businesses more competitive and ensure this industry’s vitality.
Climate change
Faced with climate change, Savoura must constantly adapt to fluctuating weather conditions: violent snowstorms that can damage greenhouses, dim winters, spring frost, summer heatwaves and so on.
Artificial intelligence may prove useful, for example, in more accurately predicting when tomatoes should be harvested.
Resistance to change
As in all industries, businesses in the agri-food industry have to deal with the fear of change.
“As a business leader, you don’t always have all the information on innovation and digital transformation, or on the technology that’s needed, which is normal. By the same token, you may feel destabilized and wonder if, given these changes, you’ll keep the same ability to lead and steer your business.”
You may also be confronted with more resistant employees who fear change. For all these reasons, you need to take the time to fully understand the coming changes, and know how to surround yourself with the right people. You also need to train your employees properly, and remember to involve them in every stage of the process.
Implementing solutions to foster successful innovation
“Innovation means starting with an idea, analyzing it, looking at its feasibility, implementing a project, measuring the results and then making sure to continuously improve what you’ve just implemented,” says Peggie Clermont.
Certain aspects will help you be open to new ideas and implement them successfully.
Management’s commitment
Peggie Clermont emphasizes how important it is for management to be committed to the innovation process. She believes it is crucial to define an action plan and devote financial resources to innovation, despite the costs—because the status quo also has a cost.
Employee involvement
Savoura can also encourage innovation by tapping into its employees’ creativity. The business has created an innovation committee that includes employees of all ages and from all departments. It has also appointed a Special Projects Manager, whose sole responsibility is to drive change for each implemented project (through coordination, documenting and training).
Collaboration and partnership
Peggie Clermont suggests that the business should look outwards to foster innovation. That means collaborating with other businesses or universities.
Community support
Different levels of government can also play a major role in encouraging innovation. “At the societal level, we need assistance programs aimed at supporting innovative businesses through financial assistance, favourable tax measures or, alternatively, by supporting training in fields related to innovation and technology,” she concludes.
