Canada: A Canadian Tax Lawyer's Commentary On South Dakota v Wayfair, Inc Et Al: Winter Is Coming For Online Retailers

Last Updated: September 18 2018
Article by David Rotfleisch

Introduction: Sales Tax Collection – Obligations & Compliance

US Supreme Court Justice Kennedy has been in the news lately. The so called 'swing vote' of the United States Supreme Court has retired. Justice Kennedy has been responsible for some of the most pivotal precedents of the past 30 years. Before departing the Court, Justice Kennedy gave one last major precedent. The news may have been over shadowed by the announcement of his retirement, but the precedent did not slip past any good tax lawyer; Canadian tax lawyers included.

Kennedy's recent decision in South Dakota v. Wayfair, Inc, et al, has overturned a long standing rule that has in many ways contributed to the rise of online retail giant Amazon and the era of e-commerce. Prior to the release of South Dakota v Wayfair, Inc et al, it was generally understood that in order to be liable to collect and remit sales taxes back to the state governments for the jurisdiction in which the consumer is located when making the online purchase, a business would need to have a physical presence in that state.

Substantial Nexus: the physical presence requirement

This need for a physical presence in the state where the consumer is located stems from the case precedents being overturned by Justice Kennedy's decision, the most recent being Quill Corp v North Dakota, 504 U.S. 298 (1992). In the previous decisions, the Supreme Court had consistently held that a state legislature is able to regulate commerce only to the extent that it does not discriminate against interstate commerce nor impose undue burdens on interstate commerce. Although this has not changed in the new decision, what has changed is the facts of doing business across state lines.

When it comes to local sales taxes, interstate commerce is still required to pay its fair share. There is no discrimination or undue burden on out-of-state retailers where the taxes are imposed equally on all retail sales. The question in issue is not whether the tax can be imposed on the transactions but rather, who does the burden of collection fall on? The Court will uphold a State imposed obligation on out of state retailers to collect and remit tax where the tax applies to an activity with a substantial nexus with the taxing State. In the absence of a substantial nexus, the State government can look only to the consumers to collect and remit the appropriate sales tax.

Taxing the Changing Retail Landscape

All previous cases have held that a 'substantial nexus' necessarily includes a physical presence. All of those cases involved, mail-order retail or something of the like. Times have changed, as we have all born witness to, and the internet has dramatically changed the way consumers interact with retailers. Not only is it now possible to purchase from a retailer who has no physical presence in the state where the consumer is located, it is often the most affordable and convenient option.

Because of this, online retailers have been able to offer the same products for the same prices as the local retailers without carrying the same burden to collect and remit the local sales tax. This has created an unintended competitive advantage for online out-of-state retailers and an ample opportunity for tax evasion for consumers.

The decision by Justice Kennedy changes the interpretation of "substantial nexus". Such a nexus "is established when the taxpayer [collector] avails itself of the substantial privilege of carrying on business in that jurisdiction". It is important to note that Justice Kennedy made specific reference to virtual presence as part of the sufficient nexus that Wayfair Inc. had in this specific case. Kennedy's reasoning is that because online retailers have out-sourced the establishment of a physical presence in any jurisdiction to the consumers, who carry around smart phones at laptops, the regular place of interaction between merchant and purchaser exists within the state.

The federal and provincial sales tax arrangement here in Canada does have a similar circumstantial trigger for a business to be obliged to collect and remit a sales tax. The federal goods and services tax, the "GST" or HST in some provinces, is levied in all provinces and territories. To comply with the federal Excise Tax Act, a non-resident supplier of goods or services must register for a GST account where they have a permanent establishment or are considered to be carrying on a business in Canada. Those businesses are obliged to collect and remit the tax.

Several Provinces (British Columbia, Saskatchewan, Manitoba, and Quebec) maintain a separate sales tax system; other provinces have adopted a "harmonized" sales tax arrangement; the difference between the two is administrative in nature.

An important note on inter-provincial trade: for a Canadian business that does not have a permanent establishment in the province into which it is making a sale, if selling to an HST province the business must still collect HST at the appropriate rate for the province in which the customer is located.

The registration requirements for the federal GST account satisfy the requirements for the provincial sales taxes in those provinces which have adopted the HST, while the provinces that maintain separate systems have their own administrative requirements.

For the purposes of the Excise Tax Act, a permanent establishment in Canada is defined

  1. A fixed place of business of the particular person, including

    1. A place of management, a branch, an office, a factory or a workshop, and
    2. A mine, an oil or gas well, a quarry, timberland or any other place of extraction of natural resources,
    Though which the particular person makes supplies; or
  2. A fixed place of business of another person (other than a broker, general commission agent or other independent agent acting in the ordinary course of business) who is acting in Canada on behalf of the particular person and through whom the particular person makes supplies in the ordinary course of business

This definition merely kicks the can down the road. The phrase "a fixed place of business[...] through which the particular person makes supplies" is not that much more illuminating that "permanent establishment".

Determining whether your business practice has a "fixed place of business" in Canada, or any particular province, is a question of fact. When assessing whether your business activity constitutes a fixed place of business, look to see how these characteristics manifest:

  1. Does your business presence take up space?
  2. Is there continuity and/ or permanency to the business activity?
  3. Does your business exercise a measure of control over the place of business?

Assuming there is a fixed place of business, the obligation to collect and remit tax is only imposed on that non-resident business if the supply of products or services is made through this place of business. This too is a factual consideration that requires a review of the characteristics that manifest in the activities of your business. The Canadian Revenue Agency (the "CRA") provides guidelines as to what factors shall be considered. The primary factors being:

  1. Whether there is authority at the place of business to enter into contracts or accept purchase orders.
  2. Whether there is tangible personal property that is being supplied is physically manufactured or produced at the place of business
  3. Where the business is providing services, whether the services is performed at the place of business; or
  4. Whether service, maintenance or repair of equipment provided by the non-resident business is performed at the place of business.

These primary factors are individually considered to be sufficient for finding as fact that the supply of goods or services is made through that fixed place of business. The CRA also provides for other factors that, taken in concert, could reach the same conclusion:

  • Does the place of business receive orders?
  • Does the place of business provide for storage or shipping of goods?
  • Does the place of business provide for the general administration of customer accounts?
  • Does the place of business provide for the advertisement of the products or services, or the solicitation of orders?

Many of these factors are targeted at a more traditional concept of commerce. Online retail businesses that want to sell into the provinces in Canada may soon face a new reality of obligations for collecting a remitting sales taxes. The significance of Justice Kennedy's decision in South Dakota v Wayfair, inc. may prompt Canadian provincial governments to bring about changes to their sales tax schemes as well.

Most notably, the province of Quebec recently announced a change to the QST (the provincially administered sales tax scheme). The so called "Netflix tax" now requires that businesses that are non-residents of Quebec must collect and remit sales taxes on intangible, digital services provided within the province. The decision of the Quebec government was in direct contrast to the decision of the federal government in the months prior.

Tax Tip: Sales Tax Collection is Changing - Seek Regular Consultation from a Tax Lawyer

If you are a business that is currently, or plans to engage in online retail and distribution to US consumers your tax realities are about to change significantly. The obligation to collect and remit sales taxes is now fair game to impose upon your business. While it will take time for the state legislatures across the United States to reform their sales tax laws, it should not take you and your business long to begin reviewing the tax planning and compliance strategies you have in place with an experienced Canadian tax lawyer. Create a plan of how those strategies may need to adapt as state legislatures respond to this case and remain informed of proposed changes at the state and provincial legislatures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions