Foreign / Canadian companies need to pay immediate attention to the recent U.S. state sales tax law changes

If you are a foreign / Canadian company that is selling to U.S. customers directly or through a U.S. subsidiary, then you want to make sure you are not required to collect U.S. state sales tax even if you don’t have an office, employee or inventory.

The U.S. state sales/use tax concept is very similar to a provincial sales tax. However, it is much more complex because every county and city within the state will have a different sales tax rate.

Remember if you are required to collect sales tax, and you don’t, then you end up having to pay out of pocket plus penalties and interest. Also depending on the state, officers/directors of your company might be held personally liable.

So why now and what changed?

The U.S. Supreme Court recently (June 21, 2018) ruled that the state of South Dakota can require a remote seller who makes a sale into the state collect sales without a physical presence.

Before this ruling, a remote seller had to have nexus (physical presence like employees, inventory, etc.) in the state before it was required to collect state sales tax.

Image courtesy of TaxJar

Now, regardless of physical presence (office/employee/inventory), a Canadian company might have to collect state sales tax if it exceeds the minimum sales thresholds in a particular state.

Quick guidance:

In summary, on an average, if your sales into a particular state exceed US$100,000 or 100 sales transactions per year, you might be required to collect state sales tax.

The effective date of the new state tax laws is on or about October 1, 2018.

Example

As an example let us look at Washington and Michigan. Both states require a remote seller to collect sales tax based on just the sales volume.

So if your sales into WA state exceed US$100,000 or 200 sales transactions per year, then you have economic nexus for sales tax collection and have to collect sales tax from your customers unless you can obtain a valid re-seller certificate.

Which States and how much time do I have?

The U.S. Supreme court ruling has given the green light to all states to pass sales tax laws requiring a remote seller to collect state sales tax regardless of the company having a physical presence in the state.

As at November 1, 2018, over 30 states have passed the law coping South Dakota. The remaining States are in the processing of passing the similar state tax laws.

Image courtesy of www.bna.com

The new sales tax laws and rules vary by state. This can be challenging. Not only do states have different sales thresholds, but they include different type of sales in the threshold test.

What are the next steps?

1) List the states where you have at least 100 transactions and/or US$100,000 in revenue.

2) Then review the tax laws in those states to determine whether you have an obligation to collect sales tax from your customers.

3) Determine whether you need to do a voluntary disclosure filing or start collecting sales tax on a going forward basis.

4) If you are required to collect sales tax, then you have to register with the state and obtain a sales tax permit.

5) Consider using a sales tax software like TaxJar or Avalara to automate the sales tax collection and remittance process. Ensure the software you select integrates with your billing/accounting software.

6) If you don’t have internal resources to do it then contact a U.S. CPA or Sales Tax, Expert.

7) However, it is also very important that you also take into account other factors like transfer pricing and state corporate income tax filings.

How does it impact a Canadian company differently?

It is very common to see Canadain companies booking the revenue from U.S. customers. Some Canadian companies might have U.S. subsidiary with sales employees.

The following question needs to be answered to structure your U.S. operations to ensure you are meeting the state sales obligations under the new state tax laws.

1) Which legal entity, Canadian or U.S. company should have a sales contract and book the revenue?

2) How will this impact transfer pricing between the Canadian company and U.S. company to ensure fair corporate taxes are paid in the respective country?

3) How will it impact state corporate income tax filings?

Does it impact my company, even if we don’t ship anything to our customers or we don’t have a U.S. company?

Remote or Out-of-state sellers include all companies including software companies. As long as you have customers in the particular state and meets sales volume threshold you might be required to collect sales tax. Remote or Out-of-state sellers also includes all foreign companies including Canadian companies.

If you need a referral to a sales tax expert or some guidance, please feel free to reach to me at ninan@i99partners.com

Disclaimer:

The purpose of this post is to summarize the recent changes in state tax laws and not an in-depth review. This post is intended for guidance only and is not legal or tax advice.