Canadian businesses exporting to the U.S. may have some state commodity (Sales & Use) tax obligations.
These obligations are in addition to their U.S. federal and state tax obligations.
There is no federal sales tax in the U.S. Each state determines its own tax system, which may include:
- Sales tax on tangible personal property and some services;
- Use tax, generally levied on goods and services purchased outside the state to be consumed in the state.
Most states (45 in 2019) levy a sales tax in their territory. Unlike the GST, QST and HST, it is not a value added tax, rather, it is imposed once on the final consumer, which may be a business. Five states do not have a sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon.
In many states, there may also be a local tax, depending on the municipality, district or county where transactions are carried out.
A Canadian corporation must invoice U.S. sales tax in each state where it is required if the following three conditions are satisfied.
1. U.S. Sales
These are sales carried out in the United States. Accordingly, the location where a sale is carried out as well as the sales and delivery conditions are often very important when determining the tax implications of a sale.
2. Sufficient presence in a state (nexus)
Your business must have a connection or nexus in the state. Each state has its own criteria for determining the connection and they differ from those that apply to state tax.
There are two types of nexus:
This is a sufficient physical presence or minimum contact in the state, such as:
- The presence of an office or warehouse;
- The presence of a representative (employee or independent);
- Sales solicitation;
- Delivery using the company’s own trucks;
- Leasing or maintenance of goods;
- The presence of inventory.
In most states, even if you do not have a physical presence, some economic presence may be sufficient to create nexus. Generally, in these states, the volume of sales or number of transactions determines whether there is economic nexus.
When you have nexus in a state, you have to file tax returns on a regular basis even if you do not collect sales tax.
3. Taxable goods and services
If the first two criteria are met, you have to collect Sales & Use tax in a state when you sell:
- Tangible personal property;
- Some services as stated in legislation and which varies depending on the state (advertising, bookkeeping, information, manufacturing, management, marketing, R&D, etc.);
- Some IT or electronic services as stated in legislation (software or IT support, for example).
It should be noted that the U.S. tax system does not give entitlement to any input tax credits. It is exemption-based: for example, sales for resale and sales to manufacturers are generally exempt.
It’s important to closely monitor your activities in each state to ensure that you meet your tax obligations. Our team of specialists can provide personalized support.
29 Jan 2020 | Written by :