While attempting to comply with tax laws for your e-commerce business, you may find yourself falling down the rabbit hole, travelling through the looking glass, and attending a Mad Tea Party.
Common sense, logic, and justice have never fully applied to the field of taxation, but this is particularly true for e-commerce transactions.
1. Canada Customs Greets You Upon Your Arrival!
Given that I am based in Canada, let us begin here.
Canada imposes what is commonly referred to as a national sales tax or a value added tax (VAT). This 7% Goods and Services Tax (GST) is applicable to a large number of Canadian transactions.
Not only is it critical to ascertain whether a taxable sale occurred in Canada or not, but also to ascertain the location of the sale. If it was made (or deemed to be made) in one of the provinces subject to the Harmonized Sales Tax (H.S.T.) (Nova Scotia, New Brunswick, or Newfoundland and Labrador), a 15% H.S.T. rate applies. This is because those provinces have entrusted Canada with the responsibility of collecting their provincial sales taxes.
Additionally, each province and territory has their own set of rules. Ontario levies an 8% retail sales tax on many common Internet transactions, whereas Alberta does not.
Of course, this is only the tip of the iceberg. This entire article is an exaggeration of a highly complex subject. You will undoubtedly require professional assistance to navigate E-Commerce Taxland.
2. When Exports Do Not Qualify as Exports
Exports are treated as “zero-rated” sales for GST purposes in Canada. This means that when you ship a product outside of Canada, you are not required to charge G.S.T. Nonetheless, you are entitled to claim (or deduct from the G.S.T. you collect) all “input tax credits” (G.S.T. paid for business purposes) associated with that export. I suppose the purpose is to promote exporting.
However, exporters of non-tangible, physical goods should exercise caution! There are numerous pitfalls to avoid.
Consider the digitised products you could sell on your Canadian website, such as e-books, downloadable software, or content subscriptions. You’d be selling “intangible personal property.” Unless your product qualifies as “intellectual property” (such as software or e-books that you created or obtained the rights to), you will be required to charge GST. According to the Canada Customs and Revenue Agency, the reason for this is that it COULD be used within Canada, even if it isn’t.
Assume you sold a membership to a customer in the United States for access to digitized content (from a variety of sources) on your Canadian website. Due to the fact that there are no restrictions on the use of intangible personal property and the property is not considered intellectual property (nor is it the provision of a service), the American customer is subject to G.S.T. even if he never visits Canada.
Interestingly, the same logic does not apply when an American purchases a regular book (or a car) that he COULD bring to Canada and use. While it is true that Canada can assess such items more easily at the border than in cyberspace, I am unaware of any instances of Americans being taxed on the books or cars they bring with them when they move to Canada for about half the year.
As a Canadian registrant, one way to legally avoid this bumbling March Hare is to state explicitly on your website and invoice that such intangible personal property is not permitted in Canada (or requires an additional fee and the payment of G.S.T.).
3. Imports That Aren’t Imports
Imports of goods to Canada are subject to G.S.T. This type of tax is frequently assessed at the border. However, what if you are a Canadian taxpayer selling to a Canadian customer but your supplier is located in another country?
Assume that a Canadian customer has purchased a book from your Canadian website. Your drop ship supplier is based in the United States of America and is GST registered. You fax your order to the American company, which then ships the book on your behalf (complete with Customs Declaration and their G.S.T. Business Number).
You wouldn’t think that after they paid the G.S.T., you’d have to charge it again, would you? “Incorrect!” exclaims the Cheshire cat. As a resident of Canada, you are required to charge and remit G.S.T.
However, aren’t you entitled to input tax credits? Frequently, the answer is “No.”
You may find it extremely difficult to meet the documentary and other technical requirements. For instance, it is not uncommon for American suppliers to flatly refuse to provide a breakdown of the G.S.T. or to permit you to act as the Importer of Record. This unnecessarily complicates their lives, and they do not require the aggravation.
There are tax provisions that apply to drop shipping, sales agents, and other circumstances. Unfortunately, in many cases, the most practical solution is to allow for double taxation.
4. When You Are Taxed Where You Are Not Taxed
It makes sense for countries to tax sales and income generated within their borders. However, does taxing sales made in the United States make sense for Germany?
In effect, the European Union began imposing an online sales tax on July 1, 2003.
This means that if an English citizen purchases an e-book from a resident of the United States, the American must pay this tax. Naturally, if the sale is made to a resident of Germany, the tax rate will be different.
The reasoning behind this is as follows: Because countries cannot collect sales tax on Internet transactions at their borders, the only way for them to do so (aside from a self-assessment system) is through an online sales tax. Additionally, it is asserted that businesses in the European Union face a significant competitive disadvantage as a result of their requirement to collect Value Added Tax (VAT) while others do not.