Alas In E-Commerce Taxland

Alas In E-Commerce Taxland

In trying to​ comply with tax laws for your e-business,​ you​ may find yourself falling down the​ rabbit-hole,​ going through the​ looking glass,​ and attending a​ Mad Tea-Party.

Common sense,​ logic,​ and fairness never did apply fully to​ the​ field of​ taxation but this is​ especially true of​ e-commerce transactions.

1. Canada Customs Welcomes you​ to​ Canada!

Since I`m located in​ Canada,​ let`s start here.

Canada has what you​ might call a​ national sales tax or​ a​ value added tax (VAT). This Goods and Services Tax (G.S.T.) of​ seven percent is​ applicable to​ many Canadian transactions.

Not only is​ it​ critical to​ determine whether a​ taxable sale was made in​ Canada or​ not,​ but also where in​ Canada. if​ it​ was made (or deemed to​ be made) in​ any of​ the​ Harmonized Sales Tax (H.S.T.) provinces (Nova Scotia,​ New Brunswick,​ and Newfoundland and Labrador),​ a​ higher,​ fifteen percent H.S.T. rate applies. This is​ because those provinces have allowed Canada to​ collect their provincial sales taxes for them.

As well,​ each province and territory has its own rules. Ontario charges eight percent retail sales tax on​ many typical Internet transactions whereas Alberta has no provincial sales tax.

Of course,​ this is​ only scatching the​ surface. This entire article is​ an​ over-simplification of​ a​ very complex subject. you​ will definitely need professional advice to​ help you​ through E-Commerce Taxland.

2. When Exports Aren`t Exports

In Canada,​ exports are "zero-rated" sales for G.S.T. purposes. This means that when you​ ship a​ product to​ someone outside Canada,​ you​ don`t charge G.S.T. Yet,​ you​ get to​ claim (or deduct from the​ G.S.T. collected by you) all the​ "input tax credits" (G.S.T. that you​ paid for business purposes) to​ make that export. the​ idea,​ I suppose,​ is​ to​ encourage exporting.

However,​ if​ you​ export products other than tangible,​ physical goods,​ beware! There are many pitfalls to​ watch out for.

As one example,​ consider digitized products that you​ might sell from your Canadian website,​ such as​ e-books,​ downloadable software,​ or​ subscriptions to​ content. you​ would be considered to​ be selling "intangible personal property". Unless your product is​ also considered "intellectual property" (such as​ software or​ e-books that you​ produced or​ have obtained the​ rights for),​ you​ will have to​ charge G.S.T. the​ reason why,​ according to​ the​ Canada Customs and Revenue Agency,​ is​ that it​ COULD be used inside Canada,​ even if​ it​ isn`t.

Say you​ sold a​ membership for accessing digitized content (from various sources) on​ your Canadian website to​ a​ customer in​ the​ United States. Since there are no restrictions as​ to​ where the​ intangible personal property may be used,​ and the​ property is​ not considered intellectual property (nor the​ provision of​ a​ service),​ the​ American customer is​ subject to​ G.S.T.,​ even if​ he never comes to​ Canada.

Strangely,​ the​ same logic doesn`t apply when an​ American buys a​ regular book (or a​ car) which he COULD bring into Canada with him and use here. it​ is​ true that it​ is​ easier for Canada to​ assess such items at​ the​ border than in​ cyberspace,​ but I know of​ no cases of​ Americans being taxed on​ the​ books or​ cars they bring with them when they come to​ live in​ Canada for about half the​ year.

As a​ Canadian registrant,​ one way you​ might legally avoid this silly March Hare is​ to​ explicitly state on​ your website and invoice that use of​ such intangible personal property in​ Canada is​ prohibited (or requires an​ additional fee and the​ payment of​ G.S.T.).

3. When Imports Aren`t Imports

Goods shipped to​ Canada are subject to​ G.S.T. on​ importation. Such tax is​ often assessed at​ the​ border. But what if​ you​ are a​ Canadian registered for G.S.T.,​ selling to​ a​ Canadian customer but your supplier is​ in​ a​ foreign country?

Pretend that your Canadian customer has bought a​ book from you​ from your Canadian website. Your drop ship supplier is​ located in​ the​ United States and is​ registered for G.S.T. you​ fax your order to​ the​ American company,​ and they,​ in​ turn,​ ship the​ book for you​ (complete with Customs Declaration and their G.S.T. Business Number).

Since they paid the​ G.S.T.,​ you​ wouldn`t think you​ would have to​ charge it​ again,​ would you? "Wrong!",​ smiles the​ Cheshire cat. Since you​ are a​ registrant located in​ Canada,​ you​ are required to​ charge and remit the​ G.S.T.

But you​ are entitled to​ input tax credits,​ aren`t you? in​ many cases,​ the​ answer is​ "No".

It may be very difficult for you​ to​ satisfy the​ documentary and other technical requirements. as​ an​ example,​ it​ is​ not uncommon for American suppliers to​ absolutely refuse to​ give an​ invoice breaking down the​ G.S.T. or​ to​ allow you​ to​ be the​ Importer of​ Record. This complicates their life unnecessarily and they just don`t need the​ aggravation.

There are relieving tax provisions covering drop shipping,​ sales agencies,​ and other situations. in​ many cases,​ unfortunately,​ the​ most practical solution is​ to​ allow the​ tax to​ be paid twice.

4. When You`re Subject to​ Tax Where You`re Not Subject to​ Tax

It makes sense that countries impose a​ tax on​ sales and income made in​ their own jurisdiction. But does it​ make sense for Germany to​ tax sales made in​ the​ United States?

In effect,​ starting July 1,​ 2003,​ the​ European Union has done just that by imposing an​ online sales tax.

This means that if​ someone from England buys an​ e-book from someone in​ the​ United States,​ the​ American should submit this tax. of​ course,​ if​ the​ sale was to​ someone in​ Germany,​ the​ tax rate would be different.

The rationale behind this follows: Since countries can`t collect sales tax on​ Internet transactions at​ their borders,​ the​ only way they can collect it​ (other than a​ self-assessment system) is​ with an​ online sales tax. Further,​ it​ is​ claimed that businesses in​ the​ European Union suffer a​ major competitive disadvantage because they have to​ collect Value Added Tax (VAT) but others don`t.

I know what they mean. Welcome to​ the​ club!

Alas In E-Commerce Taxland

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