Maryse Janelle
Partner | Lawyer, LL.B., M. Fisc. | Tax

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.

An increasing number of states (30 as of the fall of 2018) require or are on the verge of requiring that businesses register for and collect Sales & Use Tax if their annual sales exceed a certain amount in the state, even though 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 the number of transactions (200 in most states).

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. For example, the average combined state and local taxes can range from 1.43% (Alaska) to 9.46% (Tennessee), according to a 2018 Tax Foundation report.
  • 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 must file sales tax returns on a regular basis even if no tax was collected.
  • 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.

18 Dec 2018  |  Written by :

Maryse Janelle is a partner at Raymond Chabot Grant Thornton. She is your expert in taxation for the...

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The Grant Thornton International IFRS team has published Insights into IFRS 16 – Lease term.

The Insights into IFRS 16 series provides insights on applying IFRS 16, Leases, in key areas. Each edition will focus on an area of IFRS 16 to assist you in preparing for the required changes on adoption of the standard.

This edition provides guidance on the determination of the lease term.

The issue

Determining the lease term under IFRS 16 is significant. Firstly, the longer the lease term, the larger the lessee’s right-of-use asset and lease liability will be. Secondly, the length of the lease term determines whether a lease qualifies for the short-term lease exemption.

Finally, IFRS 16 contains additional application guidance on how to deal with periods covered by options to extend or terminate a lease. While the new detailed guidance can be helpful, it also means there is more to consider when determining the lease term.

This bulletin explains the key aspects of determining the lease term at commencement date and when it should be reassessed.

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If you’re a manufacturing SME, you’ve got a lot to gain by taking the industry 4.0 shift … and a lot to lose if you don’t!

On the positive side, the technologies to initiate a digital shift are more accessible and numerous resources are available to help.

WHAT IS 4.0?

Considered the fourth industrial revolution, 4.0 is characterized by the integration of digital technologies into manufacturing processes. The transition to 4.0 can be undertaken in phases, in line with your needs. The benefits can be derived by approaching the shift one project at a time.

Our team recently reviewed Quebec and Canadian studies on the topic, which illustrate that innovation and industry 4.0 are more essential and profitable than ever.

According to entrepreneurs consulted in connection with SITQ’s Baromètre industriel québécois 2018, manufacturers that don’t embrace this shift run the risk of disappearing in a few years. They believe that businesses have to innovate to stay competitive and meet their customers’ requirements.

A global transformation movement

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A smart factory calls on real-time communication to oversee activities and react.

The internet connects the entity’s entire ecosystem—employees, systems, machines, products, customers, suppliers, etc.—allowing manufacturers to increase their efficiency, offer more personalized products and react more quickly to customer needs.

The impact on manufacturing promises to be remarkable: highly automated and flexible factories can now compete against low-cost factories in Asia. Leading-edge plants are appearing around the world, to the point that the manufacturing sector is being transformed into a high-tech sector.

According to the Baromètre industriel 2018 mentioned above, in Quebec, three quarters of manufacturing SME have integrated digital technology or plan to, primarily in the following areas:

  • Real-time monitoring and control (52%);
  • Equipment interconnectivity (40%);
  • Robotics (34%);
  • Lights-out production (29%).

Multiple benefits for companies

There is no doubt that the 4.0 shift pays. Businesses that have integrated digital technologies or plan to, report better results than those that have not adopted them or do not plan to, according to the SITQ’s Baromètre industriel 2018 and a 2017 Business Development Bank of Canada (BDC) survey of some 1,000 Canadian entrepreneurs.

The main benefits include:

  • Increased productivity in 60% of cases. The main driver of productivity growth is the capacity to predict and prevent downtime and optimize equipment effectiveness and maintenance;
  • Stronger increase in sales and the number of employees. Businesses that have adopted these technologies are almost twice as likely to forecast annual revenue growth of 10% or more in the next three years;
  • Higher customer renewal;
  • Overall product quality improvement. For example, quality control in real time helps reduce and even eliminate customer returns for products that do not meet specifications;
  • Higher probability of international sales and greater capacity to innovate.
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Almost half of Canadian businesses that have adopted 4.0 say they achieve operating cost savings, thanks to:

  • real-time production monitoring and quality control to reduce waste and rework;
  • predictive maintenance to prevent costly repairs and unplanned downtime;
  • higher automation to save labour costs and improve throughput;
  • the use of 3-D printers to achieve faster prototyping, reducing the cost of engineering and accelerating time to market.

PME Innovation and technologie - RCGT

HEADING TOWARDS GROWTH: THE BASIC RULES OF A SUCCESSFUL 4.0

However, there are a few basic rules to ensure a successful 4.0 shift and truly reap the benefits. They are:

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1. Prepare a strategic plan

This is probably the most significant tool to give the company a vision of its development in a highly competitive environment where innovation and the digital transformation will quickly become a necessity to maintain and develop new markets.

Developing a solid 4.0 strategy is as important as acquiring and integrating new digital technologies with significant investments—that generally represent 7%-9% of a manufacturing SMEs sales.

The digital plan must be embedded in the organization’s strategic planning. Its objective will be to optimize current tools, prepare a plan for future technology acquisitions and ensure consistency and integration based on the business model.

2. Call on specialists

Entrepreneurs who have already implemented a digital transformation will tell you: calling on specialized resources to support your process is key.

Our specialists can guide your strategic planning and help you benefit from R&D tax credits and financial and other support programs, such as Investissement Québec’s Innovative Manufacturer.

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3. Engage management in the process

A successful industry 4.0 initiative and digital transformation must have management’s complete support. Management must first pinpoint opportunities for achieving gains and then mobilize employee know-how to efficiently deploy the 4.0 initiative.

In its study, Prendre part à la révolution manufacturière? Du rattrapage technologique à l’industrie 4.0 chez les PME, the CEFRIO explains that management must:

  • Define the vision and principles underlying the initiatives;
  • Encourage, simplify and regulate digital utilization within the organization;
  • Adequately support the initiatives with investments that are commensurate with the objectives and by supporting the teams in charge;
  • Convince, reassure and play the role of transformation ambassador;
  • Provide for the means to support collaboration, experimentation and entrepreneurship in the teams;
  • Identify what expertise needs to be acquired and forge partnerships that will complete the team’s strengths and bring the organization further;
  • Reinforce collaboration with customers and suppliers to make inter-entity projects and direct customer contribution to the innovation process easier;
  • Keep employees informed on an ongoing basis about the organization’s position on the transformation resulting from the initiatives.

Moreover, it’s important to make managers aware of the digital shift and train them in this area, as some may not be well equipped to successfully undertake the process. For example, you could present actual digital technology integration cases.

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4. Skillfully manage the labour issue

Training and recruiting employees is a major challenge for organizations undergoing a 4.0 shift.

According to the BDC, the lack of qualified employees (42%) heads the list of the biggest challenges faced by Canadian entrepreneurs when implementing digital technologies. Next were excessive costs (38%), unclear return on investment (31%) and employees’ resistance to change (31%).

The SME must examine the new skills required and the qualified staff it needs. Competencies most in demand for industry 4.0 include:

  • Data management;
  • Data security;
  • Human-machine interaction;
  • User interface design;
  • Software development;
  • Programming;
  • The science of data and analytics.

5. Pay special attention to cybersecurity

IT security is a critical consideration in the shift to industry 4.0 given the increase in data and systems—which are generally interconnected and decentralized.

Interconnectivité

 

Lessons learned

In closing, here are five major lessons learned in the aeronautics industry that has extensive innovation experience:

  • Be prepared to change your business model and strategies;
  • Think strategically and for the long term;
  • Be aware that the business environment has new technological needs;
  • Manage digital projects with the same discipline as any other project;
  • Remember that the digital shift is, by far, not just a technology matter.

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Our webinar on 2018 IFRS developments that took place on December 12th is now online.

The session will provide an overview of the following, among others:

  • Newly published or amended International Financial Reporting Standards (IFRS);
  • Some practical issues, including those related to cryptocurrencies;
  • The IASB’s work plan;
  • Regulatory developments.

Each participant will be able to take a test at the end of the session. A training certificate, which applies to training hours recognized by the Quebec CPA Order (OCPAQ), will be given to each participant who passes the test.

The certificates will be mailed within two weeks from taking the test.

Please note that this information session is in French.

Access the session: https://www.icastpro.ca/events/raymond-chabot-grant-thornton/2018/12/12/actualites-ifrs