Guide to U.S. Sales Tax for Canadian Sellers
- Sales Tax
- December 30, 2016 | Laura McCamy
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 with a little thing called nexus.
US Sales Tax Nexus for Canadian Sellers
Just because you are 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 at its most basic is a physical presence in a state, such as a business location. In the era of online shopping, the definition of nexus has become more nuanced.
You have US sales tax nexus, even if you are based in Canada, if you have a physical location in the U.S. such as an office, a store, or a warehouse. Remote employees create nexus in the U.S. state where they live. If you have an employee, such as a sales rep, who travels in the US, the time your employee spends in a particular state can create 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 create nexus. Track where your FBA inventory has created U.S. sales tax nexus through Amazon inventory reports.
Nexus doesn’t stop at physical locations and employees. Affiliate marketing nexus, also known as click-through nexus or Amazon laws, is a concept that has been adopted by a number of states, starting with New York. Aimed at getting Amazon to pay state sales taxes, these laws create nexus when an affiliated website generates a certain amount of sales for your business.
For instance, you sell cowboy hats out of Winnipeg and you enter an agreement with the Cowpoke Journal to promote your goods and send customers to your site. You give the Cowpoke Journal a commission for every referral that turns into a sale. The person who runs the site is based in Arkansas, which has a click through nexus law. If your affiliate relationship generates at least $10,000 in sales during a 12-month period, you’ve got U.S. sales tax nexus in Arkansas.
Like most other US sales tax rules, the regulations governing click-through nexus vary from state to state.
Exemptions from US Sales Tax
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 US sales tax to the order. Likewise, if your sale is tax exempt (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.
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. Some states make it easy by allowing you to do this through an online form. Once you have registered, you will be required to fill out regular sales tax returns.
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.