E-commerce is the new normal. The massive consumerism attracts many businesses to benefit the most.
It has tremendously made it easier to reach your customers at any place in the world.
This is obvious in the revenue of major e-commerce companies as well. Following are the revenue for top e-commerce giants across the world in 2020:
- Amazon 280.5 billion
- JD.com: 82.86 billion
- Alibaba Group 71.98 billion
When the market adopts new trends and shifts, governments drive new rules to regularize them properly. E-commerce taxation is one of those new rules.
Understanding E-commerce taxes within a country may appear simplistic to grasp. However, the complexity takes in when you deal with cross-border E-commerce taxes.
Since you may need to comply with the regulations of the two countries, it will take extra energy to grasp the concepts.
In this article, we have discussed a tax guide for Canadian E-commerce sellers in the U.S. We have started by comparing the Canadian tax system with the U.S. and then talked about the processes you need to go through to file your taxes accurately.
Sales Tax Differences Between the U.S. and Canada
Sales tax is an extra amount you pay by adding it to the original price of any good and service. They are normally categorized with the following abbreviations:
- ET (Excise Tax)
- RST (Retail Sales Tax)
- SUT (Sales and Use Tax)
- GST (Goods & Services Tax)
If you are a Canadian E-commerce seller, you may be well-informed by your own regulations in the country. However, if you sell your E-commerce products in the U.S., the regulations are a little different.
Following are the three main differences:
| Rule | Canada | United States (US) |
|---|---|---|
| Regulated by | Federal rules | Each state |
| Charges on B2B | Yes | Mostly exempted by using a resale certificate |
| Who possesses the power to impose taxes? | Federal and provincial | County, municipality, and independent school district. |
The major difference between Canada and the U.S. sales taxes is that you need to comply with the regulation given by the state in the U.S. A person living in a different state may need to comply with different tax rules than a person living in another state.
Similar goes for your E-commerce business – it depends upon the state you operate in.
Moreover, the level of economic activity also has a variable effect on your e-commerce business. We will discuss this in the coming section.
Sales Tax Nexus in the U.S. E-commerce
In June 2018, in a famous decision by the supreme court judges in the South Dakota vs. Wayfair, it was decided to create an economic nexus classification to determine the sales.
Sounds confusing, let’s break this.
E-commerce business is a bit confusing to be taxed. Different businesses have different operations in the U.S. Some of the businesses will only receive and deliver the order; Others will have a proper setup for the operations.
To determine the tax, the U.S. asks the level of engagement your business has in terms of economic activity (economic nexus) and in terms of physical stores (physical stores).
Requirements to be categorized under physical nexus:
- You have a physical office in a state.
- You have employed people, and they operate in any state.
- You have used any warehouse in the U.S.
Requirements to be categorized under the economic nexus:
- You have crossed a threshold of sales that is defined by each state.
- You have earned a certain amount of money that is defined by each state.
Moreover, the duration (depends upon state-to-state) in which you operate can also influence your taxes.
If your business is affiliated with another business that is categorized under the nexus, your business may also result to be categorized in the same way.
Once you have defined your economic and physical nexus, the tax rate varies for different situations. We’d recommend consulting a professional cross-border CPA here.
Processes get complex and it may charge you extra taxes. A professional CPA can save your taxes.
It is also important to note that some of the states are still in the process to enact these laws. However, most of the states have already implemented this rule outside sellers.
Understanding Tax Exemption
As mentioned earlier, the U.S. sales tax for online e-commerce sellers will depend upon state-to-state. However, we have gathered a list where you can look for tax exemptions.
Moreover, some broad points for the tax exemptions have also been listed.
- The taxes under food and medical necessaries are mostly exempted.
- B2B sale taxes are exempted if you have a resale certificate.
- You are NOT exempted by sales tax under the US-Canada tax treaty.
- You (Canadian e-commerce businesses) are not exempted from sales tax under LAW 86-272.
Tax Filing Process for Canadian E-commerce Sellers in the US
There are four stages you need to go through to file your e-commerce taxes.
1 – Determine your Economic Nexus
As discussed before, the taxation rates depend upon the level of involvement your business has in the U.S. You should first calculate your economic nexus by the criteria mentioned earlier in the article.
2 – Comply with the State Rules you are Operating in:
Since taxation has variability depending upon the state, you should figure out which state you are operating in. There are states in the U.S. in which you don’t even have to file your sales taxes.
3 – Comply with the Formal Processes
Once you understand the regulations of the state, make sure you file all the necessary forms and documents.
They may require the following documents:
- a) Your EIN (Employer Identification Number)
- b) The address of your business
- c) Your NAICS code.
4 – Calculate your Taxes
Once you understand all the regulations, you should now calculate all of your taxes by the desired rate of the state. You need to keep a record of all your business activities in order to file correctly.
Also read: Tax Forms and Deadline for Canadians Selling Products in the U.S.
Consult a CPA
Taxation processes do not remain static. They keep on changing. At AkifCPA, we have spent years understanding the complex challenges and taxation regulations.
We make sure that you save money with us. Contact us today. We are just a click away.
