Workshop B Effect of U.S. Wayfair Decision on Inbound and - - PDF document

Tuesday & Wednesday, January 28‐29, 2020

Hya Regency Columbus, Columbus, Ohio

Workshop B

Effect of U.S. Wayfair Decision on Inbound and Outbound Cross-Border Sales Involving Canada

Tuesday, January 28, 2020 1:45 p.m. to 2:45 p.m.

Biographical Information

Terence Valencic Jr., CPA, MT, Senior Manager, State and Local Tax Parker-Hannifin Corporation, 6035 Parkland Blvd., Cleveland, OH 44124 216-896-3341 Fax: 216-896-4039 terence.valencic@parker.com Terry began his tax career with the Cleveland office of PricewaterhouseCoopers in

• 2005. Over his 10+ years with PwC, Terry progressed to become a Director in the State

and Local Tax practice. He worked with large publicly-held, multinational companies as well as a variety of privately-held clients. In his various client service roles, his primary focus was in the state and local income tax arena. He was primarily responsible for ASC 740 state income tax reviews, compliance and other consulting and planning projects. Terry joined Parker-Hannifin Corporation in 2015 and leads the state and local tax team. He and his team are primarily responsible for state and local income/franchise, sales/use and property taxes. Terry is also responsible for integrating tax technology tools across various Parker platforms. Terry holds a Bachelor of Science in Business Administration degree from The Ohio State University and a Master of Taxation from the University of Akron. Terry is a CPA and member of the Institute for Professionals in Taxation. Rosemary J. Anderson, CPA, CA, Partner, Thorsteinssons LLP 595 Burrard St., Vancouver BC Canada V7X1J2 604.602.4279 rjanderson@thor.ca Rosemary Anderson has practiced exclusively in solving Canadian sales tax and customs issues for clients for more than twenty years. Formerly the partner in charge of indirect tax for Price Waterhouse in Vancouver, Rosemary has extensive experience businesses around the world with their Canadian sales tax and customs issues. Rosemary joined Thorsteinssons in 2001 and was appointed National Practice Group Leader in 2008. Thorsteinssons LLP is the largest law firm practicing exclusively in tax in Canada. Rosemary is recognized by International Tax Review as one of Canada’s Leading Indirect Tax Advisors. Rosemary is one of ten practitioners on the Chartered Professional Accountants Commodity Tax Committee for Canada and is also involved in practitioner liaison committees with the Province of British Columbia.

Biographical Information

Edward J. ("Ted") Bernert, Partner, Baker & Hostetler LLP 200 Civic Center Dr. Ste. 1200, Columbus, OH 43215-4138 ebernert@bakerlaw.com 614.462.2687 Fax 614.228.1541 Ted Bernert concentrates his practice in the area of state and local taxes, with a particular emphasis on the major Ohio taxes affecting businesses and business owners – sales and use, financial institution, personal income, commercial activity and real property taxes. He represents national companies concerning Ohio tax matters related to compliance, planning and tax legislation. Ted is chair of the State and Local Tax Committee of the American Bar Association Tax Section, and is a past chair of both the Ohio State Bar Association Taxation Committee and the State and Local Tax Section of the Columbus Bar Association. Ted was appointed by the governor to the Ohio Business Gateway Steering Committee to address the continued development of an electronic link for filing taxes and other matters affecting business. He also serves as a member of the Ohio Chamber of Commerce Taxation Committee. Ted is an adjunct professor of state and local taxes at the Capital University Law and Graduate Center, and served as chief editor of Ohio Tax Review, formerly published by the center. He currently serves as the co-editor of the Guidebook to Ohio Taxes, published by Commerce Clearing House. He has repeatedly been named a “Super Lawyer” in the area of taxation and holds an AV rating by Martindale-Hubbell.

Wayfair – Effects on Inbound and Outbound Cross-border Sales Involving Canada

Rosemary Anderson, Thorsteinssons LLP Terence Valencic, Parker Hannifin Corporation Edward (Ted) Bernert, BakerHostetler LLP

Introduction

• When the Wayfair case was being argued to the U.S.

Supreme Court, interested parties asked the Court to address the international implications in its decision.

• The Court wholly failed to address the application of the

new use tax nexus standard to sales across national borders.

• After Wayfair, there is a need to focus on its

international implications.

• While sales of tangible personal property present the

most pressing concern to sellers, cloud computing, streaming services and other aspects of the digital economy are focusing attention on the ability of markets to impose tax on remote sellers selling to customers from abroad.

2

Introduction (Cont.)

• This session will limit its focus to the

international side of Wayfair.

• The issue is whether the inbound sales

from Canada are subject to many of the considerations as interstate sales.

– We will not be addressing the effect of Wayfair on interstate sales, which is addressed in a number of other sessions.

• On outbound sales, there are a number
• f issues confronting those selling into

Canada.

3

Introduction (Cont.)

The initial reactions to Wayfair on the international front typically was the following:

• Wayfair was a case involving interstate and not

international commerce and surely the rules are different when the seller is a foreign company.

• Wayfair is not binding on Canada or its provinces

and thus changes nothing.

• Even if the states could apply Wayfair in the

international context, surely the states would not be chasing sellers trying to enforce U.S. judgements in foreign countries because countries do not enforce

• ther countries’ tax laws absent a treaty.

Over time, the thinking has evolved.

4

International Commerce Versus Interstate Commerce

• The treaties generally, and the U.S. and Canadian

treaties in particular, do not insulate sellers from being subject to subnational (states, provinces, counties, cities) taxes in the other country.

• The physical presence standard operated like the

permanent establishment concept for the income taxes covered by treaties.

• Sellers assumed that with no permanent

establishment and no physical presence, there was no need to comply.

• When the states were relieved from establishing

physical presence for sales and use tax, the settled expectations of sellers that absent a physical presence in the states, the tax laws of the destination states did not apply to cross-border sales, suddenly disappeared as a defense.

5

Canada and its provinces were not affected by Wayfair

• Unquestionably, Wayfair has no direct

impact above the border.

• Moreover, the treaties between Canada and

the U.S. do not provide that the states can enforce their tax judgments in Canada.

• However, the Canadian provinces are

paying attention to the revenue opportunities presented by seeking PST from U.S. sellers using Wayfair as a model.

• The OECD has also recommended

expanding VAT registration requirements to address ecommerce transactions which Quebec adopted effective January 1, 2019

6

Forcing Canadian sellers, especially affiliates of U.S. companies, to collect taxes of the U.S. states.

• The most significant evolution of thought has
• ccurred in the analysis as to whether

Canadian sellers should collect U.S. tax on in- bound sales.

• Even though the states cannot expect to be

able to enforce tax judgements in Canada,

• ther reasons exist why the Canadian

companies may begin to collect.

7

Why Canadian sellers may need to comply.

• The most prevalent scenario that we have

seen that pushes the Canadian seller toward compliance in the U.S. is having an affiliate in the U.S. providing the hook for the state revenue authority.

• The issue is less about the U.S. affiliate

creating nexus for the Canadian entity and more about the U.S. taxing authority seeking recovery of the Canadian entity’s tax against the U.S. affiliate for amounts owed to the Canadian company.

8

Why Canadian sellers may need to comply. (Cont.)

Reasons other than the existence of a U.S. affiliate:

• The Canadian seller may have other

business relationships in the states including:

– U.S. banking/credit card arrangements – U.S. content network and advertising services.

9

Why Canadian sellers may need to comply. (Cont.)

• The U.S. states may come under pressure

to enforce tax obligations against foreign seller in order to “protect” U.S. interstate sellers.

• The Canadian seller may be looking ahead

to sell its operations and a likely buyer would be concerned about potential back liability for the period before the sale.

• The Canadian seller may choose to use a

U.S.-compliant marketplace facilitator to extend its sales into the U.S. and allow the marketplace facilitator to collect the tax.

10

Marketplace Facilitator

• The introduction of the marketplace facilitator

concept in the U.S. appears to be a potential game-changer for the future of collecting use taxes.

• Because the marketplaces will be filing returns

and be subject to audit, the Canadian seller’s activities will be revealed to the U.S. taxing authorities and the marketplace could be subject to garnishee-type actions by which the U.S. taxing authorities seek payment for tax from the marketplace for sales not made through the marketplace.

11

Dealing with marketplace facilitators

• Canadian sellers thus can sell into the U.S. and

avoid the obligation to collect use tax by using a U.S.-compliant marketplace facilitator to collect the tax.

• The use of the marketplace facilitator could also

trigger an obligation for the marketplace seller to collect on sales not made through the facilitator and could provide a source of payment of unpaid tax for those other sales by a garnishee process.

• Canadian sellers using a U.S.-compliant

marketplace facilitator must review the contracts between itself as the marketplace seller and the marketplace to ensure that the marketplace is properly complying with U.S. law.

12

Dealing with marketplace facilitators (Cont.)

• The marketplace seller can be held

liable when the marketplace facilitator does not comply.

• The marketplace seller should insist

that marketplace facilitator certify compliance to the seller.

• Note also that the marketplaces are not

subject to class actions in many states and thus may have an incentive to

• ver-collect tax not really owed.

13

Looking ahead as to inbound sales.

• It is not our intention to suggest that all Canadian

sellers with no connection to the U.S. other than customers must be collecting the states’ use tax.

• U.S. interstate sales will remain the focus for the

post-Wayfair compliance.

• We submit, however, that the international sales

warrant a careful analysis of overall operations of the seller to determine whether the seller should collect the tax.

• There will be occasions when an international

seller should collect U.S. use taxes absent any physical presence in the U.S.

14

Registration by Canadian sellers

• Registration can present some difficult issue

– Questions about when the seller began doing business, which could trigger an audit for the past. – Registration may require a federal employer identification number (FEIN)

• It may be possible to obtain a “state” number to

use to complete the registration

• May need to seek the state number separately

from the registration process

– Need to consider voluntary disclosure agreements before registering if the seller had physical presence in the past.

15

Retroactivity

States are not applying Wayfair retroactively, but

• Some state statutes implementing Wayfair

have been in place for a while.

• States reserve the right to apply physical

presence standards from the past.

• Some states and localities, e.g. South

Carolina, Louisiana and maybe Ohio, argue that that they can assert a tax- collecting responsibility against marketplaces, think consignment sales, before the effective dates of marketplace facilitator statues.

16

Other Taxes

• The focus of this panel is on U.S. use taxes

and Canadian GST.

• States are using “big data” to match records

about taxpayer compliance with different taxes.

• Every time that a seller registers for the use

tax or GST, the seller should assume that the registration will put the taxpayer on the taxing authority’s radar.

• In some states, registration specifically does

not create nexus for other taxes but in some states, the registration itself triggers nexus.

17

Other Taxes (Cont.)

• In any case, nothing prevents the states

from using use tax registration to begin an audit for other taxes.

• Under a recent amendment applicable to

Streamlined Sales Tax states, the taxing authority should give the registrant an

• pportunity to explain why other taxes

should not apply before assessing.

• In theory, states could go back indefinitely

but normally the states limit the lookback although the period can be long, e.g. 7 years.

18

Business to Business Sales

• In some states, sales for resales and
• ther exempt sales nevertheless qualify

as sales for determining nexus.

• In the BtoB context, sellers may need

to collect exemption certificates even if all of their sales are exempt sales.

19

Effect of Wayfair on Outbound Sales

20

The Wayfair Decision – a Canadian perspective

• Influential from a Canadian tax policy

perspective

• Canadian constitutional law is very

different from the US

• Since the Wayfair decision: broader

registration requirements by provinces Query: have the provinces gone beyond their powers set out in the Canadian constitution or under international law?

21

Outbound Sales

Issues:

• Requirement to register and

collect federal or provincial sales taxes

• Collecting the correct rate of tax
• Compliance Requirements

22

Canadian Sales Taxes

• Value-added Taxes

– Federal: “Goods and Services Tax” (GST) – Provincial “Harmonized Sales Tax” (HST) – Quebec Sales Tax (QST)

• Sales & Use Taxes (provincial sales taxes)

– Manitoba – Saskatchewan – British Columbia

23

Value-added Tax Rates

• Federal GST/HST:

– 15% Nova Scotia, Newfoundland, New Brunswick and Prince Edward Island – 13% Ontario – 5% Everywhere else

• Quebec Sales Tax (“QST”)

– 9.975% – Combined with GST = 14.975%

24

Sales and Use Tax Rates

• Saskatchewan – 6%
• Manitoba- 7%
• British Columbia- 7%

Provinces/Territories without Provincial Level Sales Tax

• Alberta, Northwest Territories, Yukon,

Nunavut

25

Sales Tax Rates (By Province)

26

Comparison of GST to S&U Taxes

27

VAT S&U Tax Burden Consumers Business & Consumers Transactions Taxed All 'Retail' Sales Tax Base IP, TPP, Real Property, & Services TPP, limited services & forms of IP

Canada’s GST: an Overview

• Excise Tax Act
• Administered by the Canada Revenue Agency
• GST + Provincial HST = Combined Rate.

– Federal GST – Current rate: 5% regardless of destination

• Provincial VAT: “HST” based on destination

– 2 different rates (8% or 10%) based on province.

• Typically invoiced as a combined rate: 13% to

15% depending on “place of supply.”

28

Canada’s GST: an Overview

• Taxable Supplies = charge with input tax

credits – Business charges tax and claims input tax credit for GST paid on all inputs.

• Zero-rated Supplies = tax-free

– No tax charged but business can claim input tax credits

• Exempt Supplies = tax embedded

– Business doesn’t charge tax but can’t claim credits

29

Canada’s GST

• Tax-free: Basic groceries, prescription

drugs, medical devices, agriculture & fishing, exports

• Tax-embedded: Financial services,

health, education, legal aid, charities, not for profits and used housing

• Single rate but rebates used to reduce

rates for some products (such as books, new housing)

30

Tips & Traps for Northbound Sales

31

Issues for US Businesses

Most common issues for non-residents:

• GST/HST

– Failure to collect GST/HST at the correct rate – Rights to recover GST paid on imported goods

• PST

– Nexus – registration/collection – Requirement to pay tax and accurately estimate tax costs

32

Canada’s GST: Registration

• GST applies to transactions deemed to be

made in Canada.

• Most supplies made by non-residents are

deemed to be made outside of Canada unless… – Supplier is registered, – Supply is made in the course of a business carried on in Canada, or – Supply of admissions / supply of books.

33

GST Registration

• Mandatory: If you have a permanent

establishment & make taxable supplies in Canada

• Mandatory: If you make taxable supplies in

the course of business carried on in Canada

• Voluntary: If certain conditions are met/ often

used if importing goods for sale in Canada  Non-resident registration requires posting security and can take more than 6 weeks

34

Registration Tips & Traps

• Trap: No PE = No GST obligation
• Canada-USA income tax treaty does

not apply to GST

• Relief from income tax ≠ Relief from

registering for GST

• Filing an income tax return to recover

withholding tax often triggers GST audit

• Registering for GST will typically trigger

an income tax review

35

GST Registration Issues

• Income tax & GST rules for PE &

carrying on business are different

• Can be carrying on business in

Canada for income tax but not for GST

– Example: Soliciting orders using independent contractors

36

GST Registration Issues

• Carrying on Business in Canada for

GST purposes?

– Question of fact

• Courts: No jurisprudence for GST

– Where is the contract concluded. – Situs of Operations

• CRA

– Uses a set of factors based on presence – P-051R sets out CRA policy and factors to consider

37

GST

CRA current policy is to look at factors that are based on situs of operations tests from income tax jurisprudence although some inconsistencies in the examples

• In general, a non-resident person must

have a significant presence in Canada to be considered to be carrying on business in Canada for GST purposes

38

Canada

CRA factors: connections to Canada

• agents or employees
• delivery
• payment
• purchases or acquisition of assets
• solicitation of transactions
• assets or inventory of goods
• place of contract
• bank account
• name and business listed in a directory
• branch or office
• where the service is performed
• manufacture or production

39

GST Registration Issues

• Special rules for certain non-residents:

– Performers – Sellers of Books and other prescribed property – Foreign Conventions

• Voluntary registration available for non-

residents if conditions are met

40

GST/HST Collection Issues

• Rate is based on destination – known

as ‘place of supply’ Place of supply issues:

• Supply deemed to be made in Canada?
• If so, rate is typically based on

Canadian customer’s address

– Issue for supplies of digital products to non-residents of Canada

41

GST/HST

Marketplace facilitators

• S. 177(1) Agent required to collect

for sales of goods made as agent for non-registered seller

• S. 177(1.11) Person may collect if

election is in place but only if seller is a registrant

• Special rules for auctioneers

42

9 Things US Businesses Should Know about GST

1. Federal legislation with federal rate + provincial rates 2. Very broad tax base - all forms of property and services 3. No PE? Requirement to register and collect tax currently based on carrying on business in Canada 4. Registration / collection applies to entire entity 5. Filing an income tax return can trigger GST audits 6. Income tax rules and GST rules are different 7. Many purchase transactions with non-residents are tax-free 8. Importing goods into Canada = GST 9. GST/HST registration rules are likely to change soon

43

Quebec

Two registration systems as of Jan. 1/ 19:

• ‘regular’ - similar to GST/HST: based
• n same factors used by CRA
• ‘simplified’ – registration based on

sales to consumers in Quebec/ no right of refund for QST paid by supplier Simplified system focused on e- commerce

44

Quebec’s Simplified System

• Applies only to those selling to

consumers in Quebec

• Very low threshold: CAD $30,000 in

any 12 month period

• Different registration rules for GST

registered suppliers

• New Marketplace Facilitator rules for

sales of IP and services – rules do not apply to sales of goods

45

Quebec

Marketplace Facilitators

• ‘Simplified system’: applies to
• perators of a ‘specified digital

platform’

– Must control the essential elements of a transaction between a specified supplier and the recipient such as billing, the terms and conditions of the transaction and the terms of delivery – Platform operator is required to remit the QST – but typically is not authorized to collect or remit GST

46

Quebec

• Sellers who only sell through a

specified digital platform do not need to register or collect QST

• Sellers who sell directly to consumers

in Quebec as well as through a specified platform need to register and collect QST on their direct sales

47

Provincial Sales Taxes

• 3 Western Provinces – BC,

Saskatchewan and Manitoba

• Limited tax base: Typically just goods,

software, telecommunications and some services but base has been expanding

• About 50% of tax is paid by businesses
• n their inputs – unlike GST/HST and

QST

48

British Columbia

• Registration rules based on location of business:

– in BC – in Canada –

• utside of Canada
• In Canada- required to register if selling TPP,

software or telecom service if person:

– Solicits persons in BC for orders by advertising or any other means; – Accepts orders originating in the Province; – Sells or provides the property or service to a person in Province; AND – Causes the delivery of the TPP to the customer

• Or holds TPP in inventory in BC at the time of sale

49

British Columbia

• Located outside of Canada?
• Registration only required if inventory is

stored and sold in the Province

• Optional registration available
• Rumor- Wayfair “North” registration

requirements are being considered

50

British Columbia

Marketplace Facilitators

• PSTA modified in 2019 to allow

collection by agent if parties agree and file prescribed form

• If charging and collecting consideration,

deemed to be acting as agent for collection

• Agent needs to be registered but principal

does not need to be

• Form (not yet available) will need to be

filed

• Joint and several liability for tax

51

Saskatchewan and Manitoba

Saskatchewan

• Expanded registration requirements in

2017

⁻ deems IP to be TPP ⁻ deems retail sale in Province ⁻ interpreted to require virtually all sellers of goods, IP and services to consumers to collect

Manitoba

• Expanded RSTA in 2016 to apply to

certain non-resident sellers although modified by administrative policies

52

Factors in determining registration

BC, SK and MN – look for connections to province:

 Registration of business under corporate law  Offices or places of business  Employees, sales agents, representatives  Location of contract  Title risk and ownership  Performance of services  Solicitation of orders  Inventory for sale/ samples kept in province  Delivery of goods to customers in province  Purchase of goods for sale

53

Sales Tax Registration

• Implications for sellers

– Other legislation: consumer protection, contract terms, product liability, environmental levies, etc. – Other taxes: income tax – Set up and ongoing compliance costs

• Complexity of legislation and its

application

• With the exception of GST/HST, no

protection for errors made by sellers

54

Sales Tax Registration

• Registering for Sales Tax increases

‘nexus’

• Should consider all implications before

‘voluntarily’ registering for any sales tax Query:

• is it worth it? Cost vs benefit
• Use of platform seller/ operator to

reduce cost and possibly exposures

55

Best Practices - Goods

• Place of Sale?

– Clear documents as to where title and risk of loss transfer to customer – Avoid confusing or inconsistent delivery terms – Clarify who is paying for delivery on documents – If not registered, do not transfer title

• r arrange delivery to customer in

that province

56

Best Practices - Services

• Place of performance

– Documents should clearly state where services will be performed – If services are in relation to real or TPP, documents should clearly specify location of property – Legal services – need to clarify matters involved and who is doing the work – QST: watch different place of supply rules depending on whether GST registered or not

57

Best Practices - Intangibles

• Rights enjoyed only in Province

– Rights to use gym, tickets to a play

• Rights that can be enjoyed anywhere

– Digital rights that can be downloaded and viewed anywhere device is located

• Rights delivered outside of the

Province

– Movies purchased in a hotel, play tickets, ski tickets – Streamed product where supplier does not deliver images AND customer must have their own telecom provider

58

Best Practices - Intangibles

• Clarify location of transaction - who is

doing what - who is delivering product/ arranging for telecom services/ use of rights

• Unbundle transactions with different tax

status - particularly for customers in BC

• Watch place of supply rules for QST

59

Best Practices - Enforcement by Provinces

• Issues for Non-resident Sellers to

consider

– Right to enter premises/ search records – Ability to collect on assessments – garnishments, etc. – Watch court filings

60

Summary

• Requirement to register in Canada

– Based on facts and circumstances – Requires detailed understanding of business

• Registration increases nexus - watch other

legislation

• Seller should not register until analysis is

complete and implications and alternatives have been considered

• REGISTRATION REQUIREMENTS LIKELY

TO CHANGE!

61

Thank you!

62

Terence Valencic, Moderator Parker Hannifin Corporation terence.valencic@parker.com (216) 896-3341 Edward (Ted) Bernert BakerHostetler LLP ebernert@bakerlaw.com (614) 462-2687 Rosemary Anderson Thorsteinssons LLP rjanderson@thor.ca (604) 602-4279