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New VAT rules in the EU: What U.S.
e-commerce
businesses need to know 

06.17.21

Read this if your company does business in the EU.

Major changes are coming to the EU VAT laws on the online supply of goods and services. The rules, which apply as from July 1, 2021, will affect U.S.-based businesses selling or facilitating sales to private individuals in EU member states. With just over a month remaining before the rules become effective, such businesses should begin immediately to prepare for their new VAT registration and collection responsibilities.

What are the new EU VAT rules?

The EU VAT rules applicable to cross-border B2C e-commerce activities are undergoing a major “refresh”—or modernization—as from July 1, 2021 (postponed six months from the originally planned effective date of January 1, 2021). From July, updated VAT rules will apply to online sales (including online marketplaces) to EU private consumers and to the import of low value goods. (The European Commission published explanatory notes on the rules on September 20, 2020, which include clarifications, FAQs and examples.)

The objectives of the new EU VAT rules are to: (i) simplify compliance obligations for vendors that potentially have to comply with the VAT rules in the 27 EU member states; (ii) increase VAT revenue for the individual member states by bringing more transactions within the scope of the EU VAT net; and (iii) reduce VAT fraud.

Any business making or facilitating online sales or deliveries of goods to consumers in the EU will likely be impacted in some way by the changes.

The EU VAT law changes are as follows:

Intra-EU sales to consumers

All B2C sales of goods will be taxed in the country of destination, meaning that sellers will need to collect VAT in the EU member state to which the goods are shipped.

The existing thresholds for distance sales in the EU will be abolished and replaced by an EU-wide registration threshold of €10,000 (approximately $12,000). This is an important change and potentially could create considerable EU VAT registration and reporting obligations for U.S.-based businesses selling goods from warehouses located in the EU if not proactively addressed.

To reduce the administrative burden and simplify VAT reporting, a new reporting system, called the One-Stop Shop (OSS) will be expanded to include the distance sale of goods. U.S. businesses can register for the OSS scheme in the EU member state of dispatch and can report and remit the VAT due via a pan-EU VAT return instead of having to VAT register in each EU member state.

Sales via online marketplaces

In certain circumstances, businesses that operate an online marketplace, known as an “electronic interface” in the EU) or that facilitate the sale of third-party goods through an online marketplace will be considered the “deemed supplier” of the goods sold to EU customers and will be required to collect and pay VAT on such sales. As a result, businesses that sell via online marketplaces (e.g., Amazon, eBay, etc.) will not be required to account for VAT on such sales. 
Imports of low value goods

The VAT exemption for “low-value imports,” i.e., goods coming from outside the EU that do not exceed a value of €22 (approximately $26) will be abolished. Instead, the sale of low-value goods not exceeding €150 (approximately $180) to consumers in the EU through the business’ own website will be subject to VAT at the applicable rate in the destination country. The VAT due on low value goods can either be collected at the point of sale by the seller or collected from the consumer before the goods are released by the customer broker/delivery service. Where the seller opts to collect VAT at the point of sale, it can VAT register under the new Import One-Stop Shop (IOSS) system to account for and remit the VAT due.

VAT registration under the IOSS has several benefits, including:

  • Transparency to consumers: The customer will not be faced with any unexpected VAT costs since the total amount paid for the goods is VAT-inclusive;
  • Reduced compliance burden: Sellers can use a single IOSS registration to report and pay the VAT due on all sales covered by IOSS. Otherwise, if the seller acts as the importer (e.g., sells goods under delivered duty paid terms), it may need to register for VAT in multiple EU member states;
  • Quick customs clearance: IOSS is designed to enable goods to be cleared through customs quickly as no VAT is due at the time of importation, thus facilitating the speedy delivery of goods; and
  • Flexible logistics: IOSS simplifies logistics since goods can be imported into the EU in any EU member state. If IOSS is not used, goods can only be imported and cleared for customs in the destination EU member state, which may result in delays and additional costs.

How will the changes impact nonresident sellers?

As noted above, the EU rule changes will significantly affect U.S.-based businesses selling or facilitating the sale of goods and services online to consumers located in the EU. With just over a month left before the rules become effective, any U.S.-based business that may be impacted should take immediate steps to:

  • Understand the EU rules and how they will apply;
  • Assess the impact of the rules on supply chains;
  • Consider the impact on pricing due to different VAT rates applying in different jurisdictions;
  • Identify any adjustments that can be made (where possible) to mitigate the impact of the rules;
  • Be prepared to comply with new VAT obligations, including additional registrations, charging and collecting VAT, filing tax and/or information returns, etc.;
  • Update and adapt accounting and billing systems and master data records to identify when VAT should be applied and the appropriate rates in multiple jurisdictions; and
  • Cancel existing EU VAT registrations for distance sales that may be replaced by the OSS registration.

Failure to comply with the rules could result in the imposition of interest and penalties on the historic VAT liability. In addition to the EU VAT consequences, business selling goods that are imported into these jurisdictions must also take into account any customs implications because any compliance deficiencies could result in imported goods being delayed in customs, causing customers to be frustrated by shipping delays.

For questions about your specific situation, please contact the International Tax team. We’re here to help. 

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Read this if you are a business owner or responsible for your company’s accounts.

US businesses have been hit by the perfect storm. As the pandemic continues to disrupt supply chains and plague much of the global economy, the war in Europe further complicates the landscape, disrupting major supplies of energy and other commodities. In the US, price inflation has accelerated the Federal Reserve’s plans to raise interest rates and commence quantitative tightening, making debt more expensive. The stock market has declined sharply, and the prospect of a recession is on the rise. Further, US consumer demand may be cooling despite a strong labor market and low unemployment.

As a result of these and other pressures, many businesses are rethinking their supply chains and countries of operation as they also search for opportunities to free up or preserve cash in the face of uncertain headwinds.

Income tax accounting methods

Adopting or changing income tax accounting methods can provide taxpayers opportunities for timing the recognition of items of taxable income and expense, which determines when cash is needed to pay tax liabilities.

In general, accounting methods either result in the acceleration or deferral of an item or items of taxable income or deductible expense, but they don’t alter the total amount of income or expense that is recognized during the lifetime of a business. As interest rates rise and debt becomes more expensive, many businesses want to preserve their cash. One way to do this is to defer their tax liabilities through their choice of accounting methods.

Some of the more common accounting methods to consider center around the following:

  • Advance payments. Taxpayers may be able to defer recognizing advance payments as taxable income for one year instead of paying the tax when the payments are received.
  • Prepaid and accrued expenses. Some prepaid expenses can be deducted when paid instead of being capitalized. Some accrued expenses can be deducted in the year of accrual as long as they are paid within a certain period of time after year end.
  • Costs incurred to acquire or build certain tangible property. Qualifying costs may be deducted in full in the current year instead of being capitalized and amortized over an extended period. Absent an extension, under current law, the 100% deduction is scheduled to decrease by 20% per year beginning in 2023.  
  • Inventory capitalization. Taxpayers can optimize uniform capitalization methods for direct and indirect costs of inventory, including using or changing to various simplified and non-simplified methods and making certain elections to reduce administrative burden.
  • Inventory valuation. Taxpayers can optimize inventory valuation methods. For example, adopting to (or making changes within) the last-in, first-out (LIFO) method of valuing inventory generally will result in higher cost of goods sold deductions when costs are increasing.
  • Structured lease arrangements. Options exist to maximize tax cash flow related to certain lease arrangements, for example, for taxpayers evaluating a sale vs. lease transaction or structuring a lease arrangement with deferred or advance rents.

Improving cash flow: Revisiting your tax accounting methods

Optimizing tax accounting methods can be a great option for businesses that need cash to make investments in property, people, and technology as they address supply chain disruptions, tight labor markets, and evolving business and consumer landscapes. Moreover, many of the investments that businesses make are ripe for accounting methods opportunities—such as full expensing of capital expenditures in new plant and property to reposition supply chains closer to operations or determining the treatment of investments in new technology enhancements.

For prepared businesses looking to weather the storm, revisiting their tax accounting methods could free up cash for a period of years, which would be useful in the event of a recession that might diminish sales and squeeze profit margins before businesses are able to right-size costs.

While an individual accounting method may or may not materially impact the cash flow of a company, the impact can be magnified as more favorable accounting methods are adopted. Taxpayers should consider engaging in accounting methods planning as part of any acquisition due diligence as well as part of their regular cash flow planning activities.  

Impact of deploying an accounting method

The estimated impact of an accounting method is typically measured by multiplying the deferred or accelerated amount of income or expense by the marginal tax rate of the business or its investors.
For example, assume a business is subject to a marginal tax rate of 30%, considering all of the jurisdictions in which it operates. If the business qualifies and elects to defer the recognition of $10 million of advance payments, this will result in the deferral of $3 million of tax. Although that $3 million may become payable in the following taxable year, if another $10 million of advance payments are received in the following year the business would again be able to defer $3 million of tax.

Continuing this pattern of deferral from one year to the next would not only preserve cash but, due to the time value of money, potentially generate savings in the form of forgone interest expense on debt that the business either didn’t need to borrow or was able to pay down with the freed-up cash. This opportunity becomes increasingly more valuable with rising interest rates, as the ability to pay significant portions of the eventual liability from the accumulation of forgone interest expense can materialize over a relatively short period of time, i.e. the time value of money increases as interest rates rise.

Accounting method changes

Generally, taxpayers wanting to change a tax accounting method must file a Form 3115 Application for Change in Accounting Method with the IRS under one of two procedures:

  • The “automatic” change procedure, which requires the taxpayer to file the Form 3115 with the IRS as well as attach the form to the federal tax return for the year of change; or
  • The “nonautomatic” change procedure, which requires advance IRS consent. The Form 3115 for nonautomatic changes must be filed during the year of change.

In addition, certain planning opportunities may be implemented without a Form 3115 by analyzing the underlying facts.

Next steps for businesses

Taxpayers should keep in mind that tax accounting method changes falling under the automatic change procedure can still be made for the 2021 tax year with the 2021 federal return and can be filed currently for the 2022 tax year.

Nonautomatic procedure change requests for the 2022 tax year are recommended to be filed with the IRS as early as possible before year end to give the IRS sufficient time to review and approve the request by the time the federal income tax return is to be filed.

Engaging in discussions now is the key to successful planning for the current taxable year and beyond. Whether a Form 3115 application is necessary or whether the underlying facts can be addressed to unlock the accounting methods opportunity, the options are best addressed in advance to ensure that a quality and holistic roadmap is designed. Analyzing the opportunity to deploy accounting methods for cash savings begins with a discussion and review of a business’s existing accounting methods.

Please contact our Tax Consulting and Compliance team if you have questions or concerns about your specific situation. We’re here to help.

Article
When interest rates rise, optimizing tax accounting methods can drive cash savings

Read this if you are a solar energy investor, developer, or installer. 

Solar energy is a popular choice for businesses looking to reduce their carbon footprint through alternative energy sources. In addition to supporting a company’s environmental, social and governance (ESG) strategy, converting to solar energy can potentially lock-in lower energy rates. Further, Section 48 of the Internal Revenue Code provides businesses that invest in solar energy a 26% Investment Tax Credit (ITC) on qualifying solar property placed in service before January 1, 2026—but only if construction begins on the property before January 1, 2023. Otherwise, the credit is phased down to as low as 10%.

The IRS has provided special rules to determine when construction begins on solar energy property for ITC purposes. Businesses seeking to maximize the available tax credits should consider beginning solar projects before the end of 2022 to be able to take advantage of the 26% ITC rate.

Phasedown of ITC for solar energy property

Under current rules, the ITC percentage for qualifying solar energy property is determined based on when construction begins, and the credit is taken in the year the qualifying property is placed in service.

For property placed in service prior to January 1, 2026, the credit is as follows: 

  • 26%, if construction begins after December 31, 2019, and prior to January 1, 2023;
  • 22%, if construction begins after December 31, 2022, and prior to January 1, 2024; or
  • 10%, if construction begins after December 31, 2023.

For property placed in service after December 31, 2025, the credit is 10% regardless of when construction begins. Unused credits may be carried back one year and carried forward 20 years.

Legislative developments

The Biden Administration has indicated its support of clean energy incentives. While the Build Back Better proposals approved by the US House of Representatives in 2021 would have modified the ITC and extended the credit to qualifying solar projects for which construction begins before 2027, the legislation was not passed by the Senate. Therefore, the above phasedown of the credit remains in force. Solar energy developers and businesses planning to invest in solar energy projects should continue to monitor potential legislative developments in this area.

Determining when construction begins

The IRS issued Notice 2018-59 to provide specific guidance on when construction begins for purposes of determining the solar ITC percentage. The notice provides two methods a taxpayer can use to establish when construction begins: (i) the physical work test, or (ii) the five percent safe harbor. Both methods include a continuity requirement.

Physical work test

Construction begins under the physical work test when the taxpayer begins physical work of a significant nature on the project. The analysis is based on the nature of the work performed—not the amount or cost of the work—with no minimum requirements. Physical work can occur on-site or off-site and includes, for example, manufacturing components, inverters, transformers, or other power conditioning equipment. The notice clarifies that physical work does not include preliminary activities (as defined) or work to produce components of energy property that are included in existing inventory or that are typically held in inventory by a vendor.  

Five percent safe harbor 

Under the five percent safe harbor, construction begins when the taxpayer pays or incurs five percent or more of the total cost of the solar energy property. Whether a cost has been incurred for this purpose is based on the taxpayer’s method of accounting. The notice provides special rules for solar energy projects consisting of multiple qualifying properties.

Continuity requirement

Both the physical work test and the five percent safe harbor include a continuity requirement, under which the taxpayer must show continuous progress toward completing the project. This means maintaining a continuous program of construction under the physical work test and satisfying a continuous efforts test under the five percent safe harbor. Whether the continuity requirement is satisfied under either method is determined based on the relevant facts and circumstances.

Notice 2018-59 also provides a continuity safe harbor, which allows solar projects to satisfy the continuity requirement if the project is placed in service by the end of the calendar year that is no more than four calendar years after the year construction began. In response to the pandemic and associated supply chain issues, the IRS issued Notice 2021-14 to extend the continuity safe harbor to six years for projects for which construction began during calendar year 2016, 2017, 2018, or 2019, and to five years for projects where construction began in 2020.

Timeline pressure

Solar energy developers and businesses investing in solar energy projects are on a tight timeline to determine whether they want to begin construction on projects in their pipeline before the end of 2022 to be able to take advantage of the 26% ITC rate.

Given the persistence of supply chain and workforce issues and the potential rush to begin construction prior to the end of the year, taxpayers should keep in mind that contractors and equipment may not be available or could be difficult to secure in time to meet the year-end beginning of construction deadline. In addition, supply chain and inventory issues may drive cost increases and thus cost overruns that must be considered when analyzing when construction begins using the five percent safe harbor.

If you have questions on this or other renewable energy tax topics, please contact our Renewable Energy team. We’re here to help.

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Year-end planning for the solar energy investment tax credit

Read this if you are interested in tax policy and infrastructure.

The Biden Administration has made tax policy a legislative priority, and the Treasury Department’s Green Book released in May provides additional details on these tax policy proposals. Congressional Democrats have also indicated their interest in tax legislation. The question is: Will we see federal tax legislation in the near future? To answer this question, we need to look at the Administration’s and Congress’ infrastructure legislative plans.

Infrastructure one

President Biden has been negotiating an infrastructure package with members of both parties. Although a bipartisan agreement fizzled in July, new life seems to have been breathed into a new agreement. During the week of July 26, 2021, the Senate reached bipartisan agreement on a $1 trillion package that includes roads, bridges, rail, airports, electric vehicles, clean water, and broadband internet, with revenue offsets such as new cryptocurrency information reporting requirements and an excise tax on chemicals. On August 10, 2021, the Senate voted 69 to 30 to pass the bill.

House consideration of the package is expected in coming weeks. Some progressive Democratic members of the House, however, have indicated that they may not vote in favor of this package unless a far larger second infrastructure package is ultimately approved.

This first infrastructure package is reportedly “paid for” outside income tax increases, which means that this infrastructure bill generally would not include the Administration’s tax proposals. There would likely be little to no Republican support for the package if the Administration’s tax priorities were included.

There does, however, continue to be strong interest by the Administration in moving forward with its tax policy priorities. That’s where a second infrastructure package comes in.

Infrastructure two

A second infrastructure package, referred to in the press as “human infrastructure,” is intended to address more intangible priorities, such as extension of the child care tax credit, healthcare, immigration and climate change. It is expected that the Administration’s and Congress’ tax policy priorities would be included in this bill. At this time, this estimated $3.5 trillion package does not enjoy bipartisan support. The package would be expected to pass the House, as House rules require only a simple majority for passage. Its path through the Senate, however, remains unclear.

In general, legislation needs only a simple majority to pass the Senate. Under current Senate rules, any senator may filibuster a piece of legislation, which amounts to unlimited speech and debate and, if unstopped, can effectively derail legislation. However, if 60 senators agree, they may vote to invoke “cloture,” which will end the filibuster and move the legislation to a substantive vote. (Cloture was invoked for Infrastructure One by a 67-33 vote.) It is expected that a second infrastructure bill would not pick up any Republican Senate votes, and there likely would be a Republican filibuster. Without any Republican support, cloture would be virtually impossible. 

There is, though, a procedural option available in the Senate to bypass the filibuster/cloture rules. Under the “budget reconciliation” process, legislation can pass the Senate with a simple majority without the threat of filibuster. While the budget reconciliation process also applies in the House, because there is no filibuster threat, the House does not need the procedure to advance legislation to a simple majority vote. 

Reconciliation bills must involve spending, revenue, or debt. There is a limit to the number of bills that may pass the Senate under budget reconciliation each year. The American Rescue Plan enacted in March 2021 utilized the budget reconciliation process to pass the Senate. The Senate parliamentarian has indicated that additional reconciliation bills may pass the Senate this year. Despite further availability of the budget reconciliation process in the Senate this year, passage of Infrastructure two is not a foregone conclusion. 

For a bill to pass the Senate under the budget reconciliation process, it needs only to garner a simple majority of votes, which, with the current Senate makeup, means 50 Democrats voting in favor, plus a 51st vote cast by Vice President Harris. There are, however, moderate Democratic senators who have indicated in recent weeks that they may not be willing to use the budget reconciliation process to advance any further legislation, at least in the short term.  

Nonetheless, on August 11, 2021, the Senate approved a budget resolution on party lines; this budget resolution will serve as the framework with which Infrastructure two will be considered on its merits. House Speaker Pelosi previously indicated that the House will not vote on a first infrastructure bill until the Senate takes procedural steps regarding Infrastructure two, so this crucial step makes the future of both packages brighter in both chambers of Congress.

Likelihood of a 2021 tax bill?

Infrastructure two is expected to be the vehicle in which tax policy priorities are included. With passage of the budget resolution in the Senate, this step certainly makes the prospects of ultimate passage much better. What remains unclear is what the underlying provisions will look like, as there remains some discomfort on the part of some moderate senators with its $3.5 trillion price tag.

All eyes are focused on two moderate Democratic senators: Kyrsten Sinema of Arizona and Joe Manchin of West Virginia. While Sinema has been instrumental in helping to reach a bipartisan deal on Infrastructure one, she indicated the week of July 26, 2021 that she does not currently support the price tag of the second bill. Manchin has also indicated displeasure with the bill’s cost. Without the support of both senators, a second bill would likely stall.

There is still plenty of time on the legislative calendar for negotiation and minds to change. Some issues members of Congress will consider are the price tag of any second infrastructure bill, whether they want to be the sole detractor within their party and whether there may be opportunity to address the policy issues in future legislation. 

Timing of a possible tax bill?

Although Congress is expected to take up consideration of Infrastructure two in the fall, whether it ultimately passes and what provisions it will contain is unclear. Senators Sinema and Manchin are two to watch over the coming weeks. 

What would be included?

The Green Book is a good starting point to understand the Administration’s tax policy priorities. Congress will have its priorities as well. If we do see tax legislation, some major provisions that can be expected to be included in a bill include increases in the corporate tax rate, individual tax rates, and capital gains rates, as well as estate tax changes and changes to international tax policy.

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2021 federal tax legislation? A review of the state of play

Read this if you are a timber harvester, hauler, or timberland owner.

The USDA recently announced its Pandemic Assistance for Timber Harvesters and Haulers (PATHH) initiative to provide financial assistance to timber harvesting and hauling businesses as a result of the pandemic. Businesses may be eligible for up to $125,000 in financial assistance through this initiative. 

Who qualifies for the assistance?

To qualify for assistance under PATHH, the business must have experienced a loss of at least 10% of gross revenue from January, 1, 2020 through December 1, 2020 as compared to the same period in 2019. Also, individuals or legal entities must be a timber harvesting or timber hauling businesses where 50% or more of its revenue is derived from one of the following:

  • Cutting timber
  • Transporting timber
  • Processing wood on-site on the forest land

What is the timeline for applying for the assistance?

Timber harvesting or timber hauling businesses can apply for financial assistance through the USDA from July 22, 2021 through October 15, 2021

Visit the USDA website for more information on the program, requirements, and how to apply.
If you have any questions about your specific situation, please contact our Natural Resources team. We’re here to help. 

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Temporary USDA assistance program for timber harvesters and haulers

Read this if you do business in New Hampshire.

On June 10, 2021, Governor Chris Sununu signed Senate Bill 3-FN (“SB3”) into law, clarifying New Hampshire’s state income tax treatment of federal loans under the Paycheck Protection Program (“PPP”). As a result of this legislation, New Hampshire now fully conforms to the federal income tax treatment of the debt forgiveness and deduction for expenses related to PPP Loans. New Hampshire businesses that had PPP loans forgiven may now exclude the debt forgiveness from gross business income and deduct the related business expenses in the same manner that they can for federal income tax purposes.

The exemption of PPP loan forgiveness from the New Hampshire Business Profits tax base is applied retroactively to taxable years ending after March 3, 2020, corresponding with the date of the enactment of the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act). New Hampshire taxpayers who received debt forgiveness through the federal Paycheck Protection Program should review their 2020 New Hampshire tax returns to evaluate whether an amended return should be filed for potential refund opportunities.  

If you have questions about how the tax law changes may affect you, please contact a member of our state and local tax team.

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Attention taxpayers doing business in New Hampshire

Read this if your company does business in Canada. 

Major changes are coming to Canada’s Goods and Services Tax/Harmonized Services Tax (GST/HST) on the online supply of goods and services. The rules, which apply as from July 1, 2021, will affect U.S.-based businesses selling or facilitating sales to private individuals in Canada. With just over a month remaining before the rules become effective, such businesses should begin immediately to prepare for their new GST/HST registration and collection responsibilities.

What are the GST/HST changes in Canada?

Currently, only nonresidents that carry on business in Canada are generally required to register for and collect GST/HST (levied at the federal level in Canada) on taxable supplies of goods and services made in Canada. If the nonresident does not conduct business in Canada, it need not register for or collect GST/HST.

The impending rules aim to level the playing field between Canadian businesses (which must charge GST/HST on the supply of goods and services) and foreign suppliers by ensuring that GST/HST applies to all goods and services used in Canada, regardless of how they are supplied or whether the supplier is Canadian or nonresident. The rules will significantly impact nonresident vendors and online platform operators, in that foreign businesses will be required to register for GST/HST, collect GST/HST from customers, and report and remit tax to the Canadian tax authorities. Three types of supplies by foreign businesses will be affected:

  • Supplies of digital services
  • Supplies of accommodation made through an accommodation platform (AP)
  • Online supplies of goods through a fulfilment warehouse

Digital services

Foreign businesses and platforms that do not have a physical place of business in Canada but that supply goods and services online to Canadian consumers and/or non-GST/HST-registered businesses (i.e., B2C transactions) will be required to register for GST/HST, resulting in an obligation to collect, remit and report tax. The tax rate will be the rate applicable in the province where the consumer is resident.

Nonresident businesses will have to register for GST/HST purposes when their sales exceed CAD 30,000 (approximately USD 25,000) over a 12-month period or they may register voluntarily where the threshold is not exceeded. A simplified online registration will be available for these businesses, but it will not be possible for the nonresident business to reclaim GST/HST incurred on its own purchases. If nonresident businesses wish to recover GST/HST paid on business expenses, they may be able to register under the regular GST/HST regime.

Accommodation platforms

An AP is a digital platform that facilitates the supply of short-term rental accommodations (i.e., rentals for less than one month) to private customers for a price of at least of CAD 20 (approximately USD 16) per day (e.g., Airbnb, VRBO, etc.).

Nonresident APs will be required to register for GST/HST, and to collect, remit and report tax on the rental charges in cases where the owner of the property is not GST/HST-registered. Where the property owner is GST/HST registered, the AP will not be responsible for GST/HST; instead, the property owner will be required to collect/remit GST/HST on the rental charges. The GST/HST rate will be the rate applicable in the province where the property is located.

APs subject to these changes should register for GST/HST under the simplified online registration.

Fulfilment warehouses and websites

GST/HST registration will be required for the following types of transactions in cases where the nonresident business’ sales to consumers exceed, or are expected to exceed, CAD 30,000 over a 12-month period:

  • Direct sales of goods by a nonresident business directly (i.e., not via a distribution platform) through its website to Canadian consumers: In this case, the nonresident business will have to register, charge and account for GST/HST. 
  • Sales of goods by a nonresident business through a distribution platform to consumers in Canada: The distribution platform operator will be required to register for GST/HST and account for GST/HST in Canada. It should be noted that no GST/HST will be due on the service fee charged by the distribution platform operator to nonresident businesses.
  • Online sales of goods by a nonresident business (but not through a distribution platform) to customers, where the goods are located in a Canadian fulfilment warehouse: The nonresident business will be required to register for GST/HST and will need to keep records on its foreign vendors and submit these to the Canadian tax authorities. These information returns will give the tax authorities insight into which nonresident businesses need to be GST/HST-registered.

Nonresident businesses that carry out the above transactions will have to register under the standard GST/HST rules rather than under the new simplified regime and will generally be able to reclaim GST/HST incurred on their purchases.

Potential Provincial Sales Tax (PST) implications

In addition to having GST/HST registration and collection obligations, nonresident vendors also may be required to register for PST. Currently, British Columbia, Manitoba, Quebec, and Saskatchewan impose a PST, and three of these provinces (i.e., British Colombia, Quebec, and Saskatchewan) have introduced rules requiring nonresident vendors selling to customers in these provinces to register for PST purposes. The rules vary by province and will need to be considered in addition to the new GST/HST rules.

How will the changes impact nonresident sellers?

As noted above, the Canadian rule changes will significantly affect U.S.-based businesses selling or facilitating the sale of goods and services online to consumers located in Canada. With just over a month left before the rules become effective, any U.S.-based business that may be impacted should take immediate steps to:

  • Understand the Canadian rules and how they will apply;
  • Assess the impact of the rules on supply chains;
  • Consider the impact on pricing due to the GST/HST and the varying PST rates applied in in the aforementioned provinces;
  • Identify any adjustments that can be made (where possible) to mitigate the impact of the rules;
  • Be prepared to comply with new GST/HST obligations, including additional registrations, charging and collecting GST/HST, filing tax and/or information returns, etc.; and
  • Update and adapt accounting and billing systems and master data records to identify when GST/HST should be applied and the appropriate rates in multiple jurisdictions.

Failure to comply with the rules could result in the imposition of interest and penalties on the historic GST/HST liability. In addition to the GST/HST implications in Canada, business selling goods that are imported into these jurisdictions must also take into account any customs implications because any compliance deficiencies could result in imported goods being delayed in customs, causing customers to be frustrated by shipping delays.

For questions about your specific situation, please contact the International Tax team. We’re here to help. 

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New GST/HST rules in Canada: What U.S. e-commerce businesses need to know  

Read this if you are a business owner.

As state and local governments look for new ways to stimulate their economies, incentivize employment and keep businesses afloat, the pressure for states to generate additional tax revenue continues. In response to this pressure, states are revisiting taxpayers’ compliance with their “nexus” rules and other tax policies and considering new taxes on digital services. In addition, many state governments are reconsidering the extent to which they are willing to conform to federal tax rules and legislation.

Taxpayers need to be aware of the tax rules in the states in which they operate. Taxpayers that cross state borders—even virtually—should review state nexus and other policies to understand their compliance obligations, identify ways to minimize their state tax liabilities, and eliminate any state tax exposure. The following are some of the state tax issues taxpayers should monitor and plan for in 2021:

  1. Passthrough entity (PTE) income tax elections
    It looks like the federal $10,000 “SALT cap” is sticking around, and more states are enacting a workaround in response. A growing number of states are allowing partnerships and S corporations to elect to be taxed at the entity level to help their resident owners get around the SALT cap. However, it is important that individuals understand the broad, long-term implications of the PTE tax election. Care needs to be exercised to avoid state tax traps, especially for nonresidents, that could exceed any federal tax savings.
  2. Impacts of federal income tax changes
    Federal tax legislation also has impact at the state level. While many states quickly settle on approaches to conform with or decouple from the federal legislation, other states have done nothing, leaving taxpayers to file state income tax returns with very little guidance on how or whether the federal changes apply.

    Now that tax years impacted by the Tax Cuts and Jobs Act are well into their audit cycles, state taxpayers that unknowingly did not correctly take federal changes into account when calculating their state taxes may be confronted by not only audit exposure, but in some cases refund opportunities. Taxpayers should review their state tax returns to identify opportunities to minimize exposure and identify refunds well in advance of state tax audits.
  3. Taxes on digital advertising services
    Maryland was the first state to enact a digital advertising services tax. Large tech companies immediately sued the state, and in response the legislature passed a bill to delay the implementation of the controversial tax until 2022. To date, several other states have introduced similar digital advertising taxes, and some states are proposing to include these services in their sales tax base. States will be closely following the litigation in Maryland as they consider their own legislation.

    The definition of digital advertising services can potentially be very broad and fact specific. Taxpayers should understand the various state proposals and plan for their potential impact.
  4. Sales and use tax nexus: Remote sellers and marketplaces
    Florida and Kansas have finally joined the ranks of states with a bright-line economic nexus threshold for remote retailers and marketplace providers. At this point, the only state without a bright-line standard or marketplace rules is Missouri.

However, retailers should not forget about physical presence. Even though most states have implemented economic nexus rules since Wayfair, the traditional physical presence rules are still alive and well. States are continuing to assess retailers that, sometimes unknowingly, have some form of physical presence in the state.

E-retailers should be sure they are in compliance with state sales and use tax laws and marketplace facilitator rules and have considered all planning opportunities. 

How we can help

We are experienced in income, franchise, gross receipts, sales and use, as well as credits and incentives. We can help taxpayers monitor state tax laws and nexus requirements, understand where they have state obligations and how to minimize them, identify and implement planning opportunities, identify and quantify tax exposures, and assist with state tax audits. 

For questions about your specific situation, please contact the State and Local Tax team. We’re here to help. 
 

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