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Updated on January 23, 2024
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.
First of all, it should be mentioned that 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 2023) levy a sales tax in their territory. Five states do not have a sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. Unlike the GST, QST and HST, the U.S. tax system is not a value added tax, rather, it is imposed once on the final consumer.
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
The business must carry out sales in the United States. To determine whether sales are carried out in the U.S., the sales and delivery terms and where the transfer of ownership takes place must be analyzed.
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:
Traditional 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 in the state (employee or independent) who solicits sales on behalf of the company;
- Delivery using the company’s own trucks;
- Leasing of goods;
- The presence of inventory.
Economic nexus
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 register and collect Sales & Use tax on your sales in that state. Some states may require the business to register and file tax returns even if it has no taxable sales.
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 specifically covered by legislation. These services vary 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.
Updated on February 12, 2021.