If you sell goods or services online, you may need to charge sales tax for eCommerce transactions. It really depends on the type of business you operate and where in Canada you and your customers are located. As more businesses move to sell online, tax agencies are getting smarter about collecting sales tax on eCommerce sales in their territory. Pressure from traditional businesses is growing, and all sellers, both online and local, may need to follow the same rules for a couple of reasons.
Fairness
In most parts of the world, online sellers with no physical presence in a province or country haven't had to collect sales tax so far. But tax authorities are slowly moving toward taxation of all sales in their territories, regardless of the seller's location. Out of region, online-only sellers have lower costs. But they also have a competitive advantage over local competitors: they don't have to charge sales taxes. This means the same product purchased locally could be more expensive than online, only because of sales tax. Creating a level playing field ensures fairness for all sellers.
Lost tax revenue on internet sales
Sellers with no physical presence in most provinces don't have to charge sales tax. But as out-of-province online sales grow, provincial tax agencies want to protect local businesses that provide both jobs and tax revenue. In its 2018 budget, Quebec announced plans to make sales tax collection mandatory for all online sales in 2019, even for out-of-province sellers. BC and Manitoba have already enacted similar measures for out-of-province sellers. It's important to understand how tax obligations on internet sales are changing. Tax agencies want to enforce tax collection by tracking online sales. It makes sense to prepare for these changes.
What is eCommerce sales tax?
An eCommerce sales tax is charged to online sales you make to your customers. A seller's physical presence (also known as "nexus" in tax and legal purposes) as it relates to commerce, whether bricks-and-mortar or online, has governed how sales tax is collected for decades. When a seller has no store, warehouse, employees or other physical presence in a region, province, state or country, taxes don't usually need to be collected. North America, Europe and other parts of the world have operated in this way for a long time. However, tax authorities and governments are taking a fresh look at these issues. Global shipping logistics and the advent of eCommerce have opened local markets to sellers across the world. For example, Amazon and AliExpress are huge eCommerce companies with worldwide reach. Sellers on their platforms connect with local buyers across the globe, while they handle all the logistics and shipping for them. In the US, local tax revenue shortfalls at the state level have grown exponentially as eCommerce continues to chip away at traditional retail. The National Conference of State Legislatures estimates that in 2017 alone, over $17 billion in sales taxes weren't collected by sellers who had no physical presence in various states.
Do I need to charge sales tax online?
Currently, there's no specific set of rules for online sales in Canada. The same rules apply to any transaction. If your business is in Canada, you need to charge sales tax for online sales to customers located in Canada (GST or HST for all online sales, provincial or Quebec sales tax in some cases). But you don't need to charge sales tax on exempt supplies (such as music lessons and child care) and zero-rated supplies (such as basic groceries). Again, the determining factor is your physical location (offices, distribution facilities, salespeople, or stores): are you located in the same province or territory as your customers? This federal government summary page shows the current sales tax rates in all Canadian provinces and territories. Follow the links to provincial or territory websites for more information. If you're setting up a business, an accountant could save you time and help you register for sales tax accounts in different jurisdictions. Like all professional services, hiring an accountant is a tax-deductible business expense.
A quick overview of current sales tax requirements in Canada
GST: must be charged on all online sales (except if you are collecting HST) to customers anywhere in Canada from sellers located anywhere in Canada, unless they're considered "small suppliers." Sales to Alberta and the three territories only require GST. (If you qualify as a small supplier and your sales don't exceed $30,000, it's your choice to charge GST or not. Tax collection involves some work, but there are benefits to collecting GST from the first dollar of sales).
- HST: includes GST and PST (at different rates) in New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario and PEI. If your business operates in one or more HST provinces, you will need to collect HST (GST and/or the provincial portion for online sales to customers in those provinces).
- PST: BC, Manitoba, Saskatchewan have provincial sales tax. BC and Manitoba require sales tax to be collected in some cases, even if the business has no presence in the province.
- QST: Quebec sales tax (QST) must be collected on all sales to customers in Quebec by any business that has a physical presence or commercial activities in QC, or that's outside the province and specifically solicits orders from consumers in QC. The small supplier rule mentioned above also applies for QST collection. See Revenu Quebec's website for details.
Proposed and anticipated changes in 2019 and beyond:
- QST: Quebec intends to make QST collection mandatory for all online sales to customers in the province beginning in September 2019 (except for small suppliers). Online services, such as Netflix, Amazon, iTunes and Spotify will start charging QST in Quebec in January.
- Besides Quebec, BC and Manitoba already require tax collection for out-of-province sellers. We'll have to wait and see if other provinces follow their lead.
Tips for staying on top of your sales tax obligations
If you sell online through platforms such as Amazon or eBay, tax calculations and collection are done automatically based on your profile. These large online platforms have many resources to help sellers. They also host seller forums that offer great info and FAQs, even if you don't use their platform. Once you set up your eCommerce system or software, test it out with simulated ("dummy") transactions to all regions. This excercise lets you see if you're charging the right sales tax online in every province and territory. If you operate your own eCommerce site, be sure to charge the right sales taxes and remit them on time. If not, you could be facing unexpected tax bills, penalties, fines and even legal action.
Selling to customers in the US
Thanks to the internet, anyone with a website or access to Amazon, eBay, etc. can reach customers across the world. Global eCommerce and logistics platforms can handle all other steps needed to get your products right to the customer's doorstep. Are you thinking about selling online to customers outside of Canada? There are big changes on the horizon:
- Canadian companies that sell online to US customers are preparing for US states to make collecting and remitting local sales taxes mandatory for all sales. Until recently, only sellers with a physical presence in a US state or local jurisdiction had to collect local taxes.
- In June 2018, a US Supreme Court ruling paved the way for states to require out of state sellers to collect and remit sales tax for all online sales in their territories.
- According to this Financial Post article, the ruling means that "states have the right to collect sales taxes on products sold by out-of-state vendors" and "effectively closes a loophole that allowed online retailers with no physical presence in a given state to avoid paying sales taxes."
Collecting taxes from US customers
Smaller businesses that distribute products through eCommerce platforms such as Amazon or eBay could be hit hard. But big or small, any Canadian business with online sales in the US may soon need to collect and remit local taxes in multiple local jurisdictions. resulting in additional costs and complexity. In a recent article, Alex Paladino, Global Managing Director, Thomson Reuters Technology Practice Group explained that "it's an incredibly complicated exercise. There are presently just under 10,000 different taxing jurisdictions in the US, each with its own compliance requirements, rates and collection processes." In the US, there are only five states without a sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. The other 45 have plenty of reasons to make collection mandatory. For now, no one knows how all these different jurisdictions would go about enforcing tax collection on foreign companies. If you sell online to US customers or plan to, you'll need to monitor the situation closely. Therefore, getting advice from an accountant who deals with US corporate taxes is a good course of action if you already have a significant US customer base.
Europe and beyond
For online sales to customers in European and in other G12 nations, physical presence is also the determining factor for tax collection, at least for now. The European Commission is considering a basic tax for online sales. It may also allow individual countries to collect their own online sales tax beyond the basic EC framework. Similar changes could be coming to other countries. Major eCommerce companies, like Amazon and eBay, might be a good place to gather general information about tax collection around the globe since they operate in so many places.
Do I need a sales tax licence to sell online?
In most cases, small businesses in Canada don't need a licence to operate or sell online. For an overview of business licences, have a look at this summary provided by the federal government. If you need to collect sales taxes across Canada, register for a GST/HST account. Moreover, register a PST account for the province you operate in and for other provinces, as discussed above. When you charge sales tax online, you're collecting it on behalf of a tax agency. Avoid penalties and interest by remitting (deposit) all tax collected by the deadlines set by each province and the CRA. If you're new at this, it's probably best to talk to an accountant. Registering for GST, HST, PST and QST accounts isn't complicated, but you'll need to know which registrations you need. If you have a presence or salespeople and customers across Canada, keep it simple and register for tax accounts in all Canadian tax jurisdictions.
