Guide to US sales tax for Canadian sellers
Canada and the U.S. aren’t just countries that share a border. We’re more like best buds. So, it’s natural that Canadian ecommerce sellers ship orders to the US. We’re right next door, after all.
This coziness brings with it some complications. Canadian sellers who ship to U.S. customers may be liable for U.S. sales tax. Here is a guide to navigating the murky waters of U.S. sales tax for Canadian ecommerce sellers.
The basics of US sales tax
Like the Canadian provinces, each U.S. state can set its own sales tax rate. Unlike Canada, the U.S. has no national sales tax. Another difference: Within most states, there can be many different sales tax rates, as counties, cities, and other local taxing districts add their own sales taxes on top of the statewide tax rates. While most states allow additional local taxes, others don't.
When a Canadian seller ships to a Canadian customer outside her home province, she adds the Canadian sales tax of the province to which she’s shipping. In the U.S., it’s not that simple. Some ecommerce orders are subject to sales tax and some are not. The difference has everything to do with a little thing called nexus.
US sales tax nexus for Canadian sellers
Just because you're manufacturing in Manitoba or crafting in Saskatchewan doesn’t mean you don’t need to collect and remit sales taxes on the orders you ship to customers in the United States. If you have sales tax nexus in the state where your customer is located, you must collect and remit sales tax on that order.
Sales tax nexus is a connection that creates a sales tax obligation.
You can have sales tax nexus in a U.S. state, even if you're based in Canada, if you have a physical presence like an office, store, or warehouse in the state. Remote employees can also establish nexus in the U.S. state where they live. And if you have an employee, such as a sales rep, who travels in the U.S., the time your employee spends in a particular state can establish nexus, even if it’s just a few days a year.
If you sell through Amazon FBA, your merchandise stored in an Amazon fulfillment center could also establish physical nexus. Track where your FBA inventory has created U.S. sales tax nexus through Amazon inventory reports.
Sales tax nexus isn't limited to physical presence. Your company’s sales or transaction volume can establish economic nexus.
All 45 states that have a statewide sales tax have an economic nexus law, as do Washington, D.C., Puerto Rico, and some parts of Alaska (where there's local sales tax but no state sales tax). Many states also enforce affiliate nexus and click-through nexus.
In addition, marketplace facilitator laws now require marketplace facilitators — think Amazon, Etsy, or eBay — to collect and remit sales tax on behalf of third-party sellers. As with economic nexus, marketplace facilitator laws have been enacted by all states with sales taxes. Missouri is the last state to enforce these laws, which it will do starting January 1, 2023.
Sales tax exemptions
There are many transactions between Canadian sellers and U.S. customers where there's no need to collect and remit U.S. sales tax. If you don't have nexus in the customer's state, you don't need to add sales tax to the order.
Likewise, if your sale is tax exempt (e.g., a wholesale order or a sale to a nonprofit if it's in a state where nonprofits are exempt from sales tax), there's no need to collect U.S. sales tax. However, exempt sales can establish economic nexus with a state, so you may need to register and file returns.
How to comply with US sales tax laws
Before you can start collecting U.S. sales tax, you need to register with each state where you have nexus. Once registered, you'll be required to comply with all applicable sales and use tax laws.
U.S. sales tax compliance can be tricky no matter what side of the border you live on. Sales tax automation software can help you grow your U.S. customer base and keep on the right side of U.S. sales tax regulations.
On July 20, 2022, this post was updated to include economic nexus and marketplace facilitator laws.
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