E-Business: Watch Out for Taxes in Effect for Each Region

Updated on June 27, 2024

Driven by the current situation, more and more businesses are turning towards e-business. What are their tax obligations?

Organizations must be aware of the impact of selling in certain territories. We’re going to review the application of commodity taxes on the sale of tangible personal property in Canada and the United States in an e-business context.

Please note that sales made to Europe could also have tax impacts in terms of European value added taxes.

Determining the tax territory

When it comes to e-business, it’s essential to determine the place of transaction, that is, the territory in which the sale is deemed to have been made, in order to know which commodity taxes are applicable. Furthermore, the rules could be different if the supply made is tangible personal property or intangible personal property. So, it’s important to properly qualify the nature of the supply made.

Supply place – Tangible personal property

Generally, a supply by way of sale of tangible personal property is deemed to be made at the place where the property is delivered or made available to the buyer.

This rule generally applies based on where legal delivery of the goods to the buyer occurs, which is determined by the terms of the applicable agreement for the sale of the goods.

In the context of e-business, where the seller handles the delivery in most cases, the applicable taxes will be determined based on the delivery address. It is therefore essential for businesses selling online to maintain a record of sales based on delivery addresses.

Transactions within Canada

With regard to interprovincial e-business, it’s important to keep in mind the different taxes applicable in each province.

First, any person carrying on a business in Canada who is not a small supplier is required to collect tax on goods and services (hereafter “GST”) on all sales carried out in Canada.

Then, according to the province in which delivery occurs, the seller needs to determine which provincial sales tax is applicable to the transaction. Please note that only the GST applies in the following provinces and territories:

Supplies made in Québec

For sales made in Québec, a business that is required to be registered for the Québec Sales Tax (hereafter “QST”) will be required to collect the GST and QST on all transactions where the property is delivered in Québec.

Provincial sales tax requirement

Some provinces have harmonized their provincial sales tax (hereafter “PST”) with the GST. As a result, these provinces have introduced the Harmonized Sales Tax (hereafter “HST”), which combines the GST and the PST. The HST applies to taxable supplies of goods made in the following provinces:

As the HST is a harmonized sales tax, businesses registered for the GST are automatically registered for the HST. Therefore, businesses must collect and remit the HST when they make taxable supplies (excluding zero-rated supplies) in the abovementioned provinces.

Please note that the HST is not at a uniform rate and varies between 13% and 15% depending on the province.

PST requirement

The other Canadian provinces, British Columbia, Manitoba and Saskatchewan, still have a PST in place. It should be noted that the PST in these provinces is quite different from the GST. It is therefore important to verify whether supplies made in these provinces are subject to PST or whether they are exempt supplies.

If the supplies made in these provinces are taxable, it will then be necessary to determine whether, as a non-resident of the province, the supplier is required to register and collect PST on its supplies made in the province.

Transactions in the United States

Many Canadian businesses are now tempted to offer their products in the United States in order to expand their market through an online sales site. These companies need to be aware of and consider the various U.S. sales tax obligations that online sales may entail.

A business is required to register for and collect U.S. sales tax on its taxable sales when it has a sufficient physical presence (hereafter “Nexus”). Until recently, a Nexus was created if the business maintained a permanent or temporary physical presence in a state through a person soliciting sales (employees or independent representatives) or through the presence of property (inventory, offices, warehouses).

In June 2018, the U.S. Supreme Court in South Dakota vs Wayfair ruled that a state could also introduce the concept of an economic Nexus. Thus, this type of Nexus now requires a company with no physical presence in a state to register for state sales tax if its sales volume in the state exceeds a certain limit.

To date, all states that have a sales tax system have adopted the economic Nexus concept.

Based on these new rules, it is paramount for a non-resident business making sales in the U.S. to consider this economic Nexus concept.

A business conducting e-business must therefore track its activities in each state to ensure that it meets all of its sales tax obligations in that state.

In conclusion, while e-business growth opportunities may be attractive, it is important that the application of consumption taxes not be overlooked. Many businesses embarking on the e-business journey are unaware that they may be required to collect and remit sales taxes in the country, province or state where their customers reside. Companies must therefore be proactive and ask themselves more questions about their sales tax obligations.

Our team of specialists can help you by offering personalized assistance.