There are very few words which can accurately describe the sheer scale of the ecommerce industry in the United States – it’s something out of this world. In 2018, consumers worldwide spent approximately USD$2.86 trillion online. The US ecommerce market is reported to have hit USD$513.6 billion, up 14.2% from 2017 – with almost 50% of that coming from Amazon sales.
Canada’s ecommerce industry may have only tipped the scales slightly in 2018 with total sales around the $22 billion mark – but it has the world’s largest trading relationship with its neighbours in the United States. In many ways, that’s one of its defining features.
The United States is well-known for its complex tax system – but truth be told, Canada’s tax system isn’t too far off. Michael Fleming is one of the world’s leading experts on sales tax in the US and Canada – and he has a resumé to prove it.
Prior to starting his own venture, Sales Tax and More, in April 2018, Michael was the director of a CPA firm that specialised in sales tax for 10 years. The man was talking about the sales tax responsibilities of Amazon FBA sellers well before anybody else was. He may be frequently asked to speak at Amazon FBA conferences all around the world, but Michael jokes that even after 20 years, he’s surprised he has a grasp on it.
This guide is part one of a four-part series on tax for ecommerce sellers. All four articles will explore the tax obligations of different markets – US and Canada, Europe (including the UK), Hong Kong, Australia and New Zealand – with insider information from leading tax experts in each market about how best to stay on top of your international taxes.
In this guide Michael helps to explain:
Without a doubt, the biggest tax issue for ecommerce sellers in the United States is sales tax. Each state has its own state or local tax rate (or both).
Historically, you needed to have some sort of physical presence in a state, i.e. a store or employees to create a linker connection – or nexus.
However, the states take the position that inventory in an Amazon FBA warehouse creates nexus – which means foreign sellers who generally don’t have any type of physical presence in the US, now also have nexus.
“FBA sellers don’t believe that, they’ll give you all sorts of arguments and reasons why it doesn’t create nexus, but that doesn’t mean anything to the states. They’re on firm ground if you look at their statutes. The state statutes say owning tangible personal property in the state creates nexus, and inventory is tangible personal property – doesn’t matter who moves it there or who controls it, it’s about who owns it,” Michael says.
What this all means, Michael explains, is that the states have been pursuing domestic and foreign companies for back sales tax based on the physical nexus of Amazon FBA warehouses – some states are pursuing money owing from up to 10 years back.
“In a state like Washington where Amazon was originally located, they’ve had warehouses there forever, they’ve been going back the full 7 years, and the penalty in the state of Washington is 39%, so the liabilities can be tremendous!
“In California, the penalties are a lot less, they’re 10%, but sales in California are generally a lot higher because that state has the biggest population – roughly 15% of the US population. California goes back to 2012 when the first Amazon FBA warehouse opened, and they want all their back tax, the penalty, and any interest,” Michael says.
On June 21, 2018 the US Supreme Court offered an opinion in the S. Dakota vs Wayfair case, giving states the right to collect tax on remote sales without a physical presence – now known as economic nexus.
At a minimum, if you process more than 200 transactions or $100,000 of in-state sales, you must collect and remit sales taxes on transactions in the state.
“So now, all of a sudden, a lot of ecommerce sellers who aren’t selling through Amazon – maybe they’re selling through their own Shopify website or drop-shipping – have this linker connection where they may have never had it before,” Michael says.
For individual state economic-nexus thresholds, Sales Tax and More regularly update their Economic Nexus Thresholds for Sales Tax Chart.
Good news if you’re an Amazon FBA seller: Amazon will collect these taxes for you. There are now 36 states, plus Washington DC, where marketplaces like Amazon are required to collect taxes. At the moment Amazon is only collecting tax in 21 states – it will take until the end of the year for the rest of the states to jump on board.
“I expect almost all of the states to want the marketplaces to be collecting tax, maybe one or two that for some reason don’t get with the programme.
“If you’re an Amazon seller by this time next year, the only two states you might have to worry about will be Connecticut, where state sales have to be above $250,000 – still a requirement to file there – and Washington, which actually has two taxes. One is the sales tax, the other is what we call the business and occupation tax. Amazon’s not going to pay that because it’s a gross receipts tax,” Michael explains.
“There are a lot of nervous people right now, because they’re hearing how the tax world has been stood on its head inside the US, and we have Amazon sending us sellers from Germany, Italy, China.
“We’re trying to get everyone to understand it’s not a big deal if you’re only selling on a marketplace like Amazon,” Michael says.
While there’s light at the end tunnel for marketplace-only sellers, unfortunately the news isn’t so good for other ecommerce sellers. If you’re an ecommerce seller making sales in the US through your own Shopify website, you’ll need to account for and file your own sales tax returns.
If you sell on both Amazon and Shopify, you still need to report your marketplace sales when filing your return for your Shopify sales – but you don’t want to pay double the tax. Michael adds there are lots of different ways you can exclude the marketplace sales, but the important thing is making sure you still account for them.
One more thing to bear in mind: yes, Amazon collects the sales tax for you, but that doesn’t mean the stock you have in their FBA warehouse doesn’t create nexus.
“A lot of people in California who sell on Amazon and their own website, argue their sales aren’t $500,000 in California, so once Amazon starts collecting on October 1, 2019, they can deregister. Unfortunately, it doesn’t work that way. You still have nexus in California, because you still have inventory there. You don’t have the responsibility to remit the tax on the Amazon sales, but nexus is nexus. Now, even though you’re not over the threshold, you still have to collect the tax on your Shopify sales,” Michael says.
“When it comes to selling through Shopify, the states over the next two years will be getting very aggressive, beefing up what we call their discovery units. These units are looking for sellers they think should be paying sales tax but are not. For foreign sellers, if they find you, they’ll still come after you but it’s a lot harder to come after a foreign seller, especially if they’re not selling on Amazon.”
The problem now becomes whether unfair advantage has been created between domestic US-based sellers, and foreign sellers. Michael talks about how the Supreme Court admit they made a mistake when originally talking about physical presence, because they’ve inadvertently created a protected class – which is hurting US-based businesses.
“Fast-forward 18 months, I don’t know what that’s going to look like, but it will get a lot easier to pursue foreign sellers, like the UK and Germany who have really cracked down. For those companies that have been compliant in the US, they shouldn’t have anything to worry about.
“Right now, there’s not a lot of past exposure with this economic nexus because it’s not that old. You really want to become compliant today if your sales are material – rather than taking the risks of being excluded from the market or paying years of back tax at some point down the road,” Michael advises.
If you need to get registered for sales tax, there are lots of companies out there that can help you. But as a foreign seller, Michael says, you want to make sure someone understands how to register you.
Whether you’re a US or foreign entity, the states want you to have a social security number. Michael explains there are workarounds for this in every state but, “You’ve got to know what those workarounds are, know the right people to talk to, know how to get the registration approved – that’s something we specialise in.”
Once you’re registered, someone needs to file your returns on your behalf. There are software companies you can use, but Michael says they come with their limitations. One of those limitations is they can’t work with foreign companies that don’t have a US bank account.
Most states don’t allow a transfer from a foreign bank account, even when using a money-transfer firm. Michael explains what they do: “We open up a sub-account under our primary account here. It’s only used for your taxes – you would send us the funds and we’d pay the state directly on your behalf.”
Michael adds that getting a US bank account is not easy – and it gets harder ever year.
“Opening a personal account is a lot easier, but you generally have to do that in person. If you can open a US bank account, you have a lot of options on who can do your returns. If you’re a foreign seller, you’ve got to pick and choose because why go out and get registered, and not be able to file your returns? You need to line that up before you decide to get registered.”
Most of the time, as a foreign seller, sales tax will be your main compliance concern. As Michel explains, the tax treaties will stop most foreign sellers from having to pay federal income tax.
But states are not a party to the tax treaties, because they are sovereign. Most states follow the tax treaties – to make it simple on people.
“There are 13 states that don’t follow the tax treaties, so in theory, there could be an income tax obligation at a state-level. You’ve got to be a pretty big seller though,” Michael adds.
In some states, even though you don’t have to pay any taxes, they still want you to file the forms.
The income tax system in the US is a progressive one, meaning all your income isn’t taxed at the one rate. It all depends on your taxable income, and which brackets you fall into. These brackets range between 10% and 37%. For example, any income over $500,000 would be taxed at 37%, any income below that threshold would fall into a lesser tax bracket.
“In general, most sellers are not going to have income tax issues in the US. The cost of compliance is usually a little bit higher for income tax, so you got to take materiality into effect.
“Even if you’re a million-dollar seller, if you’ve got a 10% profit margin, you must apportion that net income to all of the states. For most sellers, you need to be up in the 4-5-million-dollar range before income tax starts to be an issue for you. Even then, only in your bigger states,” Michael says.
If you’re a US citizen, you must file for income tax no matter where you’re located or where the income is earned.
The waters often get muddy where there isn’t a current tax treaty, for example, like with Hong Kong. Hong Kong is specifically excluded from the US-China tax treaty, and there isn’t a tax treaty between the US and Hong Kong.
“The way that I read the tax laws, I think there’s a good possibility someone in Hong Kong would be subject to income tax here in the US as well as in Hong Kong, but I’m not an international tax expert by any means.
“Generally, with our foreign sellers we recommend they defer to their accountant in their home country for income tax there.”
While tax in the US may seem all-consuming, Michael says ecommerce sellers need to ask themselves whether staying compliant makes for good business.
He says you’ve got to use common sense, because it may cost you more to try and do what the states say than let the states come to you.
“I think we need to…look at the materiality when deciding whether it makes sense to register for tax. What the states say doesn’t always make good business sense.
“If you’re trying to be compliant, you may end up paying more to register and for the compliance than you would if it was back tax – including any penalties and interest.”
The same thing with income tax: “Again, it’s a function of how big you are, what your sales are in each state, what the cost of compliance is – it’s got to make sense. For the majority of sellers, by the time you’re going to apportion your profits to each state, it’s not a whole lot of money.”
While Canada’s trading relationship with the US is the strongest in the world, their tax system is unique.
“It’s not quite like the US, or the European Union countries, it’s sort of a cross between the two,” Michael laughs.
In Canada you have 10 provinces and three territories, all of which pay the federal-level VAT tax called goods and services tax (GST) of 5%. A value-add tax means pretty much everybody pays tax at every step of the supply chain. So long as your revenue in Canadian dollars is less than $1.5 million, you will file this return annually.
The one big difference with Canada’s GST is that it’s added on top of the sales price and is separately stated on your invoice. Amazon will do this automatically for you.
Then you have local level taxes for the 10 provinces only which come into effect once you’re registered for GST.
Five of the 10 provinces – Ontario, Prince Edward Island, New Brunswick, New Foundland and Labrador, and Nova Scotia all harmonise their local-level tax of 8%, called HST, with the federal level GST. In these five provinces, when you register for GST, you’re automatically registered for HST – one registration, one return.
Alberta, like the 3 territories, also doesn’t collect on any local tax – only GST.
The provinces of British Columbia, Manitoba and Saskatchewan all have sales tax – like the US. Canada’s version of nexus is called ‘carrying on business’. If you’re an Amazon seller, you don’t need to worry about sales tax in Manitoba or Saskatchewan because Amazon doesn’t have warehouses there – you’re not ‘carrying on business’ so not liable for sales tax.
British Columbia is home to an Amazon warehouse, so you should be getting registered for the federal-level GST plus the British Columbia provincial sales tax (PST). It’s a 7% tax rate, and because it’s a different government entity, there’s a separate registration and separate return that needs to be filed.
“That return is generally filed monthly, sometimes quarterly. There’s no rhyme or reason to it, they just decide which you’re going to be without any formula, and you’re stuck with that for at least six months. After that you can request that the frequency be changed,” Michael explains.
Depending on what you sell, most items are going to be taxable – there are very few exemptions in Canada. But because the PST is a sales tax, there are exemptions. In other words, you could have something that’s taxable for GST but exempt from PST.
For an Amazon seller, Amazon takes care of all that behind the scenes, so you don’t have to figure it out, but if you’re a Shopify seller, you’d need to figure out which of your products is taxable for PST.
Shopify sellers, unlike Amazon sellers where carrying on business prevents them from needing to collect PST, you may need to collect sales tax in Saskatchewan, and Manitoba – that local tax is called RST.
“This is why I call it the alphabet soup of taxes,” Michael laughs.
Quebec is the final province – and is again a little different to the other nine provinces. The local-level tax in Quebec is identical to the HST in terms of function, but it’s called the Quebec Sales Tax or QST. If you’re not registered for QST, all your GST gets filed with Revenue Canada in one return. Once you register in Quebec, the GST owing in Quebec must be sent to Revenue Quebec. Quebec doesn’t currently have an Amazon warehouse, so as an Amazon seller, you don’t need to worry about paying local-level taxes in this province. All other tax rules are the same including input tax refunds (called credits in all other provinces).
Canada prevents double taxation with input tax credits. Once you’re registered for GST, you can take a credit for Canadian federal-level GST that you pay in the normal course of business.
For Amazon sellers, Amazon automatically makes you the importer of record, which means whoever is clearing customs for you – generally your logistics company – is paying a cross-border tax of 5%. If you’re not registered for GST, that becomes a hard cost and there’s no way of claiming that money back.
Once you’re registered, the 5% becomes an input tax credit so when you collect money from your customers (or Amazon collects it for you), you can pay yourself back.
Michael says it’s an incentive to get registered, compared to in the US where its just a cost you incur.
“A large seller in Canada could actually make money by getting registered. Amazon has warehouses in British Columbia, Ontario and Alberta. In British Columbia and Alberta you’re going to pay the 5% on your Amazon fees, but in Ontario which is an HST province, you’re going to pay the 5% GST plus the 8% HST (a total of 13%), which you can claim back because it’s tax paid in the normal course of business.”
Michael jokes: “People think the US is confusing when it comes to nexus!”
Canada’s version of nexus – ‘carrying on business’ – is not determined by physical presence, but rather a list of 13 defining factors. They consider industry – “you could have two companies with the same exact facts, but different industries, and one will be carrying on business” – inventory location, local employees, and whether you have a Canadian website.
This time it’s good news for Shopify sellers. Michael says your typical ecommerce store not selling on Amazon probably won’t have nexus in Canada, unless you decide to use a Canadian warehouse or distribution company.”
“With Amazon, it’s not just that you have inventory in Canada, the entire transaction is happening within Canada,” Michael says.
Michael wishes he could say the tax registration process in Canada is simple – unfortunately, not so much.
Firstly, if you don’t have a Canadian social insurance number, everything must be done by fax or mail!
Secondly, Canada has two offices that process out-of-country registrations (if you’re a foreign seller) – the West Coast and East Coast offices. Both offices are always backed up. The East Coast office can take up to six months, the West Coast two to three months – and you don’t get to pick which office you send your application to.
Sellers from outside Canada and the US, plus merchants in certain US territories, go to the East Coast office, and the US western states go to the West Coast office.
If you’re not registered in Canada, you’re not entitled to input tax credits. With the registration process, they can only back-date your approval 30 days, even if your application was made six months ago, so here’s what Michael says to do:
“As soon as you submit your application you want to turn the tax on. They’ll ask to see five invoices as proof and back-date your approval to the date on your invoices, so you don’t miss out on 5 months of input tax credits.”
Lastly, foreign sellers will require a security deposit – anywhere between CAD$5,000 – $1,000,000. The deposit is based upon 50% of the preceding year’s GST. If you’re a new seller, you won’t have a preceding year of sales, so you can waive this requirement for the first year.
“Now technically the second year you’re supposed to pay it, but none of our clients ever do. Who wants to have money sitting in a deposit or security bond? Canada will still allow you to collect and remit tax, and the only problem is if you ever need a refund, they’ll apply that refund to the deposit – they won’t send it back to you,” Michael advises.
Most Canadian companies will be set up with an income tax account when they register for GST. Income tax in Canada is based on a marginal tax rate system meaning rates vary depending on the amount of income you earn, and you pay different rates on different portions of your income.
Just like the US, Canada has many tax treaties with other countries globally, so most foreign sellers won’t have to pay income tax. “Just be mindful, they sometimes still want the forms filed,” Michael says.
For Amazon sellers in Canada, your provincial tax obligations are directly linked to where Amazon has its warehouses. At the moment you’re liable for the federal-level GST, HST in Ontario and PST in British Columbia. Michael says this is where you need to make smart business decisions.
“If you’re selling $10,000 in Canada, you’ve got to look at materiality – how much is it going to cost you to be compliant and does it make sense to go ahead and get registered?
“Watch the level of your sales – if you’re all of a sudden sending $40-$50,000 of inventory into Canada, 5% of that is only $2000 and you can probably take care of everything for less than that.”
For Shopify sellers, things can get a little complicated.
“If you’re selling on Shopify, and shipping your inventory directly to your Canadian customers, they’re the importer of record and are paying the cross- border tax, so there’s no financial incentive for you to register. You’re also definitely not ‘carrying on business’ because your inventory is offshore.”
Often, ecommerce sellers will be selling on more than one platform.
“If you’re selling on Shopify and Amazon, once you’re registered in Canada, all your Canadian sales, no matter which platform they’re from, will need to be collecting tax – so in that case you would also need to collect the tax on your Shopify sales.”
Michael says he’s always impressed when ecommerce sellers manage their own taxes internationally, but often it’s something they want to hand off to someone else to worry about. When you do, he says make sure that person has experience with foreign companies – if you’re a foreign ecommerce store. Look for an ecommerce specialist accountant, maybe in your home country, that has worldwide connections.
“It’s about the capability of who you’re working with. We have tax partners around the world in all the major markets – Australia and Europe – we handle the US and Canada, and we refer back and forth.”
Michael admits the US and Canada “don’t make anything easy” so you’ve got to figure out a way of determining what your Amazon sales are, on a per-state or per-province basis.
A2X for Amazon – and A2X for Shopify – will do that for you. It will also be able to tell you where your inventory is, so you don’t end up paying too much in back tax (yes, they back-tax on inventory because it’s still considered nexus!).
Michael explains there are applications outside of sales tax as well for accountants – profitability reporting and doing general business.
“A2X makes it easy to get out of Amazon and Shopify the information you may need for a plethora of reasons, and quickly import it into QuickBooks, Xero or Sage. Using a tool like A2X gives you more confidence that you’re actually getting all the information you need.”
With crossed fingers, Michael hopes A2X continues to grow and add more ecommerce platforms to its repertoire – selfishly, more for accountants than anything, he jokes.
Wrapping up, Michael says, “That’s a 10,000 foot overview of sales tax in the US and Canada, but that’s really all ecommerce sellers need.”
While it may seem like doom and gloom for all ecommerce sellers in the US, Michael predicts things will change again in the next 18-24 months.
“There were like 8 states that came out originally and said 200 transactions would create nexus, but already they’re coming back saying 200 is too low, we’re going to be nice and waive that. That’s a good thing, another trend that’s positive for ecommerce sellers.”
You can get all tied up in the minutia of tax, but Michael wants to remind ecommerce sellers that at the end of the day, it’s about making smart financial business decisions – and that’s where having the help of a professional can be of real benefit.