charging provincial/state sales and use tax?

It’s an all too familiar ‘quick question’ asked over a casual drink: “do I have to charge sales and use tax on this order to [insert state or province] if I don’t have an operation there and ….”

Below is some general guidance but please be sure to check with the finance/revenue ministries of each state or province to be sure whether or not you have to collect and remit if you are selling to customers who reside in the state or province the goods are to be delivered/used.

In general, the determining factor in both Canada and the United States is whether you have a ‘presence’ in the state or province the goods are delivered to. The gray area is defining ‘presence’ as it differs from state to state and province to province. It’s safe to say that if you have people (employees, service people or independent sales/service agents) or property (inventory, offices, warehouses) you have a substantial physical presence and should charge the local sales and use tax.

Canada

First, you know you have to charge either GST (BC, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, PEI, NWT, Nunavut, Yukon) or HST (Nova Scotia, New Brunswick, Newfoundland and Labrador) on every order as well as PST for orders shipped to customers in your own province where you have a physical presence, if required (e.g. if your physical province is Alberta there is no PST).

A quick summary of the list of taxes you should be collecting and remitting currently might look like this if you didn’t have a presence in the province listed:

• BC - GST and PST (their ‘presence’ is so broad that if you took a breath there you have to charge the provincial tax).
• Alberta - GST
• Saskatchewan - GST (PST is voluntary - note 1 below)
• Manitoba - GST and PST (again presence is very broad)
• Ontario - GST (RST has physical presence constraints to review)
• Quebec - GST and QST (mandatory)
• New Brunswick - HST
• Nova Scotia - HST
• Newfoundland & Labrador - HST
• PEI - GST (PST is voluntary - note 1 below)
• NWT - GST
• Nunavut - GST
• Yukon - GST

United States

In the States the substantial physical presence in known as “nexus”. The threshold for nexus varies from state to state but as mentioned above if you have a business location or employees living in or working in the state or jurisdiction then you have established nexus and should charge the local sales and use tax for the state and/or jurisdiction (e.g. if you have a sales rep living in New York City, you will have to charge state tax and potentially a tax for the city jurisdiction too).

OK, back to that drink. You don’t have a substantial physical presence and it is not one of the provinces in Canada that is mandatory so don’t charge the state/provincial tax.

But please note two things:

1. that if you do not charge and collect sales and use tax, the responsibility falls onto the purchaser to ‘self assess’ whether they would normally have paid the tax and remit accordingly. Many states and provinces encourage non-resident businesses to consider becoming licensed as a convenience to their customers (”voluntary remittance”);
2. if you didn’t charge because you determined you did not have a presence and the local tax authority later finds that you should, the company will owe tax, interest and penalties that you will have to eat (no sense and going back to re-invoice the client for your error). If you are going to have a lot of sales into a particular state/province you better make sure why you are not collecting and remitting.