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.