U.S. Wayfair Ruling Could Bring Tax Changes in Canada

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

By Peter Menyasz

The U.S. Supreme Court’s groundbreaking ruling in the Wayfair case dealing with tax from online retailers could spur Canadian governments to start taxing sales of retailers with no physical presence there.

The court ruled June 21 in South Dakota v. Wayfair that state and local governments could begin collecting sales tax from online retailers, overturning a decades-old precedent.

The blockbuster ruling may sway Canada’s government to change its stance on taxing sales by online giants like Netflix Inc., or could lead to broader federal tax changes, tax lawyers told Bloomberg Tax.

“If a person were to claim that provinces cannot force an out-of-province vendor to collect the local tax, Canadian courts will look at the Wayfair decision and may come to the same conclusion,” Louis-Frederick Cote, a tax lawyer with Montreal law firm Spiegel Sohmer, said June 26.

The Wayfair ruling, seen as a major victory for brick-and-mortar retailers, fits into broader conversations about tax rules surrounding digital companies, including how to tax them when revenue is derived from multiple jurisdictions.

Watch Quebec

Practitioners pointed to Quebec as ground zero for sales tax on digital platforms.

Quebec on March 27 proposed a 9.975 percent sales tax on digital platforms, which was seen as a potential model for other provinces and the federal government.

Manitoba, Saskatchewan, and British Columbia also have out-of-province provisions in their sales tax laws.

“While the government has been clear that it will not make Canadians pay more for their online services, it is also examining the broader implications of the rapid growth in electronic commerce for tax systems,” a Department of Finance spokesman said June 26. He declined to comment specifically on the implications of Wayfair.

Most provincial finance ministries contacted by Bloomberg Tax didn’t offer comment on how they might respond to the Wayfair ruling.

However, Nova Scotia and New Brunswick said they will follow the federal government’s lead because their provinces use the Harmonized Sales Tax, while Ontario’s ministry said it couldn’t comment because it is in “caretaker mode” pending the swearing-in of a new government on June 29.

Federal Changes Possible

Provinces may want to reciprocate and impose sales taxes on international vendors but that might be hard for those that have adopted the harmonized sales tax (HST), which combines provincial sales tax with the federal value-added goods and services tax (GST), Solhi said.

“Unless the GST/HST rules are amended to impose an economic nexus test rather than a physical test, like in Wayfair, it is very unlikely that Ontario, for instance, could impose its own sales tax in this manner,” it said.

Quebec, British Columbia, Saskatchewan, Manitoba, the Northwest Territories, Nunavut, and the Yukon Territory haven’t adopted the HST.

Or, the government may follow Quebec’s lead by applying the GST/HST rules to non-resident retailers, said Toronto tax lawyer David Sherman.

Canada has a robust system to collect GST/HST at the border and on inter-provincial shipments to an HST province, but goods sold into provinces with a separate provincial sales tax aren’t subject to that tax if the seller has no physical presence in the province, Sherman said.

Some Skeptics

Provinces may not rush to adopt the Wayfair approach, practitioners said.

They may instead wait to see how Quebec’s “experiment” in collecting from out-of-province vendors pans out, said Joel Nitikman, a partner with Dentons Canada LLP.

“Maybe a province has nothing to lose, so they pass a law and hope for the best and figure that whatever they collect is more than they are collecting now,” he said June 26. “Or maybe they don’t because they don’t want companies thumbing their noses.”

Even in the U.S., states must decide whether to apply the Wayfair ruling to foreign retailers, and it may prove difficult to force Canadian retailers to collect and remit state tax, he said.

And because the ruling is specific to U.S. laws surrounding inter-state commerce, it’s possible Canada won’t be swayed to amend the GST/HST legislation at all, Simon Thang, a principal with Thang Tax Law Professional Corp., said June 28.

Reciprocity Agreements

Provinces choosing to apply sales tax to retailers outside their borders may need to negotiate reciprocity agreements, as they can’t enforce their laws in other jurisdictions, Cote said. That would apply to the federal government if it required foreign vendors to collect GST/HST, he added.

Reciprocity agreements may even be required in the U.S., as the Wayfair ruling grants states the power to require out-of-state vendors to collect tax, but not to enforce the requirement, he said.

Selling to the U.S

Regardless of the changes in Canada, domestic businesses selling into the U.S. should pay attention because they could be required to register for and collect state tax, practitioners said.

Bobby Solhi, a partner with TaxChambers LLP, said the ruling will have a significant impact on Canadian retailers that sell to U.S. customers. “Vendors other than Amazon or eBay will be caught off-guard by this ruling,” he said June 27.

To contact the reporter on this story: Peter Menyasz at correspondents@bloomberglaw.com

To contact the editor on this story: Penny Sukhraj at psukhraj@bloombergtax.com

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax