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!
J. Stephen Pope, President of Pope Consulting Inc.,
http://www.popeconsultinginc.com/ has been helping
clients to earn maximum business profits for over
twenty years.
For valuable Work at Home Small Business Ideas, visit http://www.yenommarketinginc.com/
