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Exporting to the U.S.: Watch Out for Corporate Commodity Taxes

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Updated on August 29, 2023

Do you export goods or services to the United States? You may be required to collect commodity taxes even if you do not have a physical presence.

The United States Supreme Court June 21, 2018 ruling in the South Dakota v. Wayfair, Inc. et al. case has paved the way for significant commodity tax changes to reflect the e-business upsurge.

As a result of this decision, economic presence provisions may now be sufficient to trigger nexus, that is, a connection that requires that you register with a state’s tax authorities.

In general, the States require that businesses register for and collect the Sales & Use Tax if their annual sales exceed a certain amount in the state, in terms of number of transactions or dollars, even if the business does not have a physical presence (e.g., offices, inventory or employees).

Among other criteria, these states set a minimum threshold for sales (generally US$100,000 of taxable goods or services) or number of transactions (200 in most states). As an exception, New York and California have a threshold of $500,000 and a handful of other states have a threshold of $250,000.

Additionally, some states include non-taxable and taxable sales tax when calculating the threshold while others expressly exclude it. So, a company might have to register for tax purposes in a state, even if it has no taxable sales in that state.

Different taxation system

The U.S. taxation system differs substantially from ours. Here are the main characteristics:

  • Generally, sales tax applies to tangible real property and certain services. Use tax is generally imposed on goods and services purchased outside the state for use or consumption in the state.
  • In the U.S., sales tax is not a value-added tax, like the GST or QST, rather it is charged once, to the final consumer, which can be a business.
  • This means you are not entitled to any input tax credits. The U.S. tax system is based on exemptions rather than tax refunds through input tax credits. For example, sales for the purpose of resale or to manufacturers are generally exempt.
  • Most states have a sales tax that applies throughout their territory (there are five exemptions: Alaska, Delaware, New Hampshire, Montana and Oregon). There is no federal sales tax.
  • In most states, a local tax may be added, depending on the municipality, district or county where the transaction occurs.
  • There may be specific provisions in counties or municipalities. For example, a good or service considered non-taxable by a state may be taxable for certain local tax purposes.

Is your business in compliance?

With the new nexus concept, businesses that export to the U.S. must be doubly alert to ensure that they comply with the tax rules in effect in the various locations they do business. We suggest paying special attention first to the states where your presence and number of transactions is the greatest.

Here other important considerations:

  • Monitor your sales in each state to ensure that you satisfy the tax rules at all times.
  • If you have nexus (physical or economic presence) in a state, you could have to file sales tax returns on a regular basis even if no tax was collected. Please note that the limitation period does not apply to return periods for which returns are due but not filed.
  • Make sure you obtain and keep all the documentation that proves the tax-exempt status of your sales in a state.
  • There are voluntary disclosure programs to rectify your situation if you failed to collect taxes that should have been.

Nevertheless, if you do business in several states, managing your tax liability may become somewhat complicated. You would be well advised to call on specialists. Contact our experts for personalized support.

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