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Sales Across the US and Canada Border: Do Sales and Duty Taxes apply?

There are many Canada-based companies selling their goods and services to the US. It comes as no surprise because the US offers great expansion opportunities and a large market for virtually any product or service.

However, some companies that hesitate to begin selling internationally claim that they are puzzled by the regulations and requirements on the trade from Canada to the US. In this article, we will cover the crucial aspects of this type of international sales.

Firstly, it is worth mentioning that sales from Canada to the US fall under USMCA – the United States-Mexico-Canada agreement. Thanks to this document, customs procedures and duties at the border are simplified.

However, the difficulties that confuse companies often arise from the varied legal and regulatory environment in each of the US states. There are over ten thousand sales tax jurisdictions in the country, meaning that the tax rates and obligations can be dramatically different in neighboring or far-away states. These jurisdictions range from large (state) to smaller (local, district, county, and special) jurisdictions.

When it comes to the customs procedures – the two countries have put a lot of effort into speeding up the processes. Of course, the health and safety regulations still apply, and the imported goods must comply with the standards of the US Food and Drug Administration. If the goods meet all the regulations, they can cross the border duty-free. However, this rule only applies to Canada-made goods and cannot be used for transshipped goods. The latter have to be registered, and duties have to be paid unless they are subject to a small value imports exemption.

The sales tax, which is somehow similar, although not identical, to the Canadian GST (goods and services tax), is a far more complicated matter. The sales tax is set by each of the states, and the rules on how and when it should be collected differ.

Prior to 2018, foreign entities did not have to collect and remit the sales tax. However, since the US Supreme Court made a significant ruling on the question, the duty to collect the sales tax can arise based on the intensity of the activities in the state and not necessarily on the physical presence of a business or its inventory.

It is important to note that not all states require collecting sales tax. Currently, sales tax is established in 45 states. All of the states have the requirement to register for a sales tax permit if a company makes economic activity in the state with an office, employees or other physical presence there. However, since 2018, most states have the so-called economic nexus rules that define the conditions for registering as a sales tax collector after exceeding a stated amount of earnings/transactions from selling to residents of the state. Some states even consider nexus to be established if a company takes part in trade shows or uses warehouses from a third-party provider in the state.

Therefore, Canadian sellers must be well aware of the differences in the regulation in the states where their customers are located and comply with these rules, collecting and filing the sales tax as required.

The difficulties with the sales tax do not end here. Different states define taxable items differently, so all sellers must research what kind of regulation applies to their products. For example, if a food item is taxed in one state, it can be tax-exempt in another or have a reduced sales tax percentage in a third state.

Do you wish to know which rules to follow for your business? Get in touch with our experts and receive expert advice on tax compliance in the US and globally.

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