The beauty of e-commerce is that borders become irrelevant. Customers can buy your products no matter where they reside, but with that expanded marketplace comes expanded tax complications and liabilities. If you’re selling products in the US, for example, you may need to file state and/or federal taxes. Thankfully, determining your tax responsibilities can be straightforward as long as you practice some due diligence and partner with a bookkeeping company that understands the complexities associated with running an e-commerce business.
If you are selling products or conducting business in another country, you incur some tax liabilities determined by your business’s “nexus.” In simple terms, “nexus” is a term used to describe the amount of business a company conducts in a particular location. The “nexus of your business” determines the types of taxes you will have to pay and where you will have to pay them. Criteria for “nexus” can differ depending on the entities involved.
Do I need to pay US Sales Tax if I am a Canadian firm selling in the US?
In the US, “nexus” and tax rates vary from state to state. In some states, a temporary presence of just a few days can trigger “nexus.” In others, an affiliation between two operations is enough. Also, some goods or services may be exempt from payment. In addition, certain consumers are also exempt from paying sales tax. If your business does have sufficient nexus with the US to invoke a tax liability, you will have to file a tax return for both federal and state taxes. In some cases, your business may qualify as a “permanent establishment,” which is similar to nexus, but only triggers state income tax liability, and no federal income taxes will be owed. Because the rules vary in the US, it’s important to check each state to see what the guidelines apply.
How do I know what sales tax to pay when I’m selling in Canada?
Canada defines “nexus” differently than the US, and bases tax liability on whether or not a company is “carrying on business” in the country. Unfortunately, “carrying on business” can be tricky to determine, though the latest guidelines can be found on the government’s website. In Canada, taxes for online businesses are based on a province’s sales tax. Each province has different tax regulations. Quebec has its own sales tax (QST), and there is a Provincial Sales Tax (PST) that works as a sales tax levied on the buyer. Online businesses must also pay 5% federal goods and services tax (GST). In some provinces, a harmonized sales tax (HST) combines both the provincial tax rate and the GST. Finally, Just like in the US, e-commerce companies will have to determine their tax liabilities in each province in which they conduct business. That means your company may owe GST, HST, or a combination of QST/PST and GST. In simple terms, you must collect sales tax at the rate determined by which province ownership of the product is being taken. Example – you are in Ontario. You sell an item to someone in Alberta. You are responsible for collecting and remitting the sales tax at the current rate in Alberta.
It is equally important for businesses operating in Canada to keep track of all your relevant business expenses. ITC’s or Input Tax Credits allow a Canadian company to deduct certain sales taxes paid from taxes collected on sales. By not keeping accurate records of your expenses you will end up paying too much in sales tax and that comes right out of your bottom line.
How can I tell if I am compliant with all of the tax laws?
Determining if you comply with tax laws can be difficult, but as long as you maintain accurate records, you will be ahead of the game. It would help if you started by researching the tax laws in each locality where you do business. Next, keep track of all business conducted in each location so that you will know precisely where you owe tax payments at the end of the year.
Optimizing Your Tax Plan
While taxes are generally about the money you owe, there are ways to mitigate your tax burden. For example, you can take advantage of the tax deductions associated with selling on multiple channels, including any hosting fees, website costs, online marketing, and other digital services.
The biggest challenge to keeping track of all the taxes and other fees that are due is to keep track of your financial information. Many e-commerce businesses struggle to do that because their bookkeepers may still be using outdated methods and not be used to working in the cloud.
At AIS Solutions, we are a 100% cloud-based bookkeeping company that understands the complex nature of e-commerce accounting and can help you keep your records straight as your business grows and ensure that you meet all of your deadlines.
To schedule a free consultation to see if we are a good fit, send an email to: info@aissolutions.ca.
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November 28, 2023
