Should Your Online Canadian Business Collect U.S. Taxes?

Published: November 24, 2014 at 11:19 by Harrison Law

It depends. Do your business activities create nexus in a particular state? The term nexus means that a business has a presence in a state and is therefore subject to state income taxes and/or is subject to sales taxes for sales within that state.

Nexus is determined differently for income taxes and for sales tax purposes.

Nexus is created for income tax purposes if a company derives income from sources within the state, owns or leases property in the state, employs personnel in the state or has capital or property in the state. The requirements vary from state to state.

Nexus is determined for sales tax purposes more loosely. A company can either have a direct presence, or a presence through a representative within a state. A presence would be established if your company had a retail store in a state, held inventory within that state, or had employees who lived or worked in that state. A company may also have nexus if it has affiliates in that state that it works with to sell its goods. You may also create nexus if you have people traveling through the state to visit actual or potential customers, attend trade shows, or have inventory in a warehouse in that state.

Most states try to find online sellers who have failed to collect and remit state sales tax. They often provide ways for citizens to turn in non-compliant businesses. They may also hire people whose job it is to seek out businesses who are not in compliance. Sales tax is a big source of revenue for the states who levy it, which creates an incentive for state authorities to be aggressive with collections. By failing to register and collect sales tax, a company can be assessed for the sales tax it failed to collect from its customers plus penalties and interest. Further, officers of the company can be held personally liable for any outstanding sales and use tax liabilities.

Nexus rules vary from state to state, so it is a good idea to check with us if you think there may be the slightest chance that your company may have established a presence in a state. For more information, email harrison@harrison.pro.