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Canadian eCommerce companies used to the simplicity of most nations’ sales tax systems (including, to a degree, their own) could be in for a shock when they try to sell online to customers in the United States. But the market of Uncle Sam isn’t a total brick wall of complexity if a Canadian seller does their homework.

Similar but more complicated

U.S.-minded Canadian “digital economy” companies enjoy an advantage over sellers from many countries where the sales tax is a uniform value-added tax. As in Canada, for instance, sales tax in the U.S. is differentiated by clear geographic boundaries – the states of the United States.

The trouble is that each of which is authorized to set and collect its own sales tax. Digital economy companies must meet these sales tax obligations even if these companies have no physical presence in a state. (U.S. states are increasingly mad for sales tax holidays like the recent one announced in Canada.) Another problem: There are 50 U.S. states, as opposed to Canada’s 10 provinces.

More confusing is the array of tax rates among those states and the thousands of other local tax jurisdictions, often in municipalities, within those states. Canada’s Goods and Services Tax, Provincial Sales Tax and Harmonized Sales Tax are relatively uniform; sales tax in the U.S. can vary widely state to state (and, believe it or not, sometimes even block to block for such items as groceries, for instance, in the state of Kansas).

Though the concept does occasionally get batted around in Washington, the U.S. has no national sales tax. In the U.S., each state’s taxation department becomes its own version of the Canada Revenue Agency. Your company must register in each state where you have sales tax nexus (see below), but thankfully you don’t generally have to register in a municipality as well as in its state.

In American sales tax, there is always a “but.” Here are two:

  • Home rule” U.S. localities’ tax jurisdictions in such states as Alabama and Colorado have their own nexus requirements, as do those in Illinois (Chicago) and Louisiana (parishes, that state’s version of counties).
  • Five U.S. states have no statewide sales tax: the “NOMADs” New Hampshire, Oregon, Montana, Alaska and Delaware. Alaska, though, is inching toward a statewide sales tax, and many communities in the state have banded together to mandate sales tax obligations for remote companies.

Nexus

In 2018, the U.S. Supreme Court decided in Wayfair v. South Dakota that states can require remote seller companies collect and remit sales tax if a company makes enough sales into a state in a given time, usually a year. This opened the floodgates to American states instituting economic nexus rules based on either a dollar volume of sales or a certain number of sales (aka the transaction threshold).

Those floodgates remain open, as now every U.S. state with a statewide sales tax also has economic nexus rules: $500,000 in annual sales and 100 transactions in the state of New York, for instance; $500,000 in annual sales with no transaction threshold in California, or $100,000 in annual sales or 200 transactions in a year in Illinois. These numbers vary state to state, though more states are dropping transaction thresholds.

If you have these volumes of sales, you must register with a state and begin collecting and remitting its sales tax. Penalties for failing to file and remit state sales tax can be severe.

Also:

  • Physical presence can create nexus in a U.S. state, a potentially growing concern in these days of remote workers, browser cookies and a vendor’s inventory warehoused in a state by a marketplace facilitator such as Amazon.
  • Depending on the state, configuration, support or training may be taxable when provided in conjunction with Software as a Service (SaaS). Telecom is another tricky area of sales tax in the U.S.

Taxability and exemptions

Generally, states require sales tax on tangible personal property. But:

  • Servicesare frequently excluded from sales tax but by no means all the time and not in all states (a wrinkle that often appears with technology products/services).
  • Situs is where a transaction’s taxability (and sales tax rate) is determined. Most U.S. states (but not all, to be sure) follow destination-based sourcing rules, where remote sellers must apply the sales tax rules and rates based on where they are shipping a product.
  • In drop shipments, where you the seller uses a distributor for order fulfillment to a buyer, a distributor must charge sales tax to the seller, who could then possibly validate their resale exemption with an exemption certificate. Understanding obligations in drop shipments involves knowing the nexus footprint of the business making the sale to the end-user, as well as the nexus footprint of the drop shipper/distributor. (We recommend the Institute of Professionals in Taxation [IPT] website and its drop shipment survey of U.S. states’ requirements.)

Sales tax exclusions apply to some items just as exclusions apply to some taxes in Canada. Exemption certificates are generally either entity-based (such as for resellers and not-for-profit) or product-based. To prove a sales tax exemption, the customer must provide a certificate. Certificates are usually state-specific, and some industries, such as manufacturing and agriculture, have many sales tax exemptions.

As you can see, the U.S. is an accessible market for Canadian companies willing to embrace the puzzle of sales taxes to the south.

TaxConnex experts specialize in the intricate world of sales tax for companies in various industries. Contact us today to learn how we can help you streamline your sales tax process and ensure compliance.

Robert Dumas
Post by Robert Dumas
January 14, 2025
Accountant, consultant and entrepreneur, Robert Dumas began his public accounting career on the tax staff at Arthur Young & Co., followed by a brief stint at Grant Thornton. In 1998, Robert founded Tax Partners, which became the largest sales tax compliance service bureau in the country, and later sold it to Thomson Corporation. Robert founded TaxConnex in 2006 on the principle that the sales tax industry needed more than automation to truly help clients, thus building within TaxConnex a proprietary platform and network of sales tax experts to truly take sales tax off client’s plates.