Canadian Ecommerce Store - USA Taxes

[Gil5757]

Hello,

I'm starting an online ecommerce site that will be selling products to the USA. The products will be drop shipped from a distributor in the US to the customer in the US. None of the products will be coming to Canada.

I was curious if anyone knows how US taxes will work. Will I need to get any resale certificates? Will I need to charge tax to customers?

The business is registered in Ontario Canada and not in a US state.

Does anyone have any experience doing this that can shed light on US taxes for this type of business setup?

Thanks in advance for your help!

Gil

[Shift4SMS]

For the most part, the current law is that if you have a physical presence in the state(s) where the products are shipped, then you must charge sales tax for that state. If you do not have a presence in the the delivery state, then you don't. I'm not sure how "drop ship" works in relation to the sales tax laws so hopefully someone else knows. My guess is that you will need to charge sales tax for the states where the drop shipper has points of presence and the delivery is to one of these states -- but that is only a guess.

[Gil5757]

Thanks Steve! My dropshippers have charged me tax because they usually have resale certificates for the same states they have warehouses. Some don't though. I was wondering if it also depends on where the products are being shipped from however I have had trouble finding an answer to this.

Would contacting the IRS be a good option?

[cw1865]

Sales tax is state based, contacting the IRS will not help you (they're Federal). Its a confusing array of laws. The general rule as stated above is that you must meet the brightline physical presence test (this is the Quill standard), but that simply doesn't end your inquiry there.

There are certain states that attempt to impose sales tax, notwithstanding your physical presence, based on the location of the drop shipper and the location of the end user. California happens to be one of them. So, if your supplier is in LA and your customer is in SF, California attempts to collect sales tax and wants you to register with California. You can actually see this rule by going to California's Board of Equalization. (The California state courts have upheld the constitutionality of this arrangement in Lyon Metal Products v. State Board of Equalization, essentially holding that there is a substantial nexus between the location of the drop shipper and the end user to impose sales tax notwithstanding the lack of a physical presence.

New Jersey, the jurisdiction I live in, follows the opposite rule where essentially a drop shipper CAN be located in state and ship to an in state end user but will not impose sales tax (NJ Steelcase Inc. v. Dir., Division of Taxation).

The California scheme is followed in a couple of states including CA, MA, NE, NV, RI, PA and TX (and there might be more). NJ, FL, ID, IL, IA and MI follow the opposite rule. These lists are not complete, I have not researched 50 different state jurisdictions.

Please also note that these sales taxation schemes are actually legally AVOIDABLE (tax avoidance is legal, tax evasion is illegal). As a practical matter, for any jurisdiction similar to California, I simply ship the item out of the state (to me) and then reship it back in. Of course the freight costs more than the sales tax, but the burden of having to file sales tax returns for multiple jurisdictions is just too great.

Resale certificates issued by any state are typically free to download online however to issue a VALID certificate you typically need a 'Certificate of Authority' which empowers you to collect sales taxes in the jurisdiction. Do this and you're going to be filing quarterly returns in most jurisdictions - do be careful.

Generally speaking, the only vendors who seem intent on obtaining my resale certificate seem to be located in the same state, a couple of vendors from out of state still want my NJ resale certificate (despite the fact that anything shipper out of THEIR state wouldn't be subject to sales tax if it was for resale or not!)

Please review: Sales & Use Tax – California State Board of Equalization

[Gil5757]

Thanks for your post! Very informative.

I tried calling the IRS and they said this is not something they can help with and told me to seek help from an accountant. As you said, it is based on state. I still wanted to call the IRS to see if there is something else I'm missing considering I'm claiming income from the USA even though my physical location is in Canada. I'm currently looking for someone who specializes in Canada/USA business relations to see if they can shed any light.

The main tax we are paying are to California residents. Our distributors warehouses are in CA, NJ and TX. I noticed we haven't paid a couple times on orders in NJ which probably goes along with what you stated.

I don't mind being charged tax - I just want to make sure we are paying the taxes that are applicable. I don't want to be told years down the road that we owe backtaxes. If a customer is located in the same state as where the product is coming from, we will pay tax.

[cw1865]

Originally Posted by Gil5757

Thanks for your post! Very informative.

I tried calling the IRS and they said this is not something they can help with and told me to seek help from an accountant. As you said, it is based on state. I still wanted to call the IRS to see if there is something else I'm missing considering I'm claiming income from the USA even though my physical location is in Canada. I'm currently looking for someone who specializes in Canada/USA business relations to see if they can shed any light.

The main tax we are paying are to California residents. Our distributors warehouses are in CA, NJ and TX. I noticed we haven't paid a couple times on orders in NJ which probably goes along with what you stated.

I don't mind being charged tax - I just want to make sure we are paying the taxes that are applicable. I don't want to be told years down the road that we owe backtaxes. If a customer is located in the same state as where the product is coming from, we will pay tax.

Well, even with your CA distributor, a sale to NV does not result in sales tax liability on the distributor located in CA or on you since neither of you are present in NV (technically the end user in NV is supposed to pay 'use tax')

In the above quote you wrote 'The main tax we are paying are to California residents. Our distributors warehouses are in CA, NJ and TX. I noticed we haven't paid a couple times on orders in NJ which probably goes along with what you stated.'

http://www.boe.ca.gov/pdf/pub121.pdf

I think this publication will illuminate some of the sales tax implications for your vendors located in California (and as well as yourself)

From this particular publication, it appears that an out of state retailer NOT registered for sales tax in California 'pushes' the liability down to the drop-shipper.

I would suggest that a call to the California Board of Equalization would be helpful.

Texas Sales & Use Tax Forms

Texas as well.....

[MayaLocke]

You only are required to pay taxes in States that you have a physical presence, if you are a Canadian company with no US offices, the purchaser would be required to pay "Use" tax if they bought your products, but its their responsibility not yours.