U.S. sales tax ruling could bite Canadian online retailers
New level of complexity with loophole closed
OTTAWA • A milestone decision by U.S. lawmakers could soon force Canadian online retailers to pay sales taxes on products sold into the U.S., part of a long-awaited ruling that will have a ripple effect across Canada’s e-commerce sector.
“It’s not just internet giants getting wrapped up in this,” said Noreen Marchand, a partner with KPMG in Toronto.
The U.S. Supreme Court ruled on Thursday that states have the right to collect sales taxes on products sold by out-of-state vendors, a decision that attempts to put e-commerce firms on a level playing field with competitors. It effectively closes a loophole that allowed online retailers with no physical presence in a given state to avoid paying sales taxes.
Maureen Atkinson, senior partner at J.C. Williams Group, said Frank And Oak, Lululemon Athletica Inc., and Aldo Group could be among the companies impacted by the changes, due to their sizable positions in the United States.
Atkinson said it is difficult to determine which Canadian companies would be most directly impacted by the ruling. Many already have a physical presence in various U.S. states and so already pay state-level sales taxes. But the changes could deeply impact smaller vendors who sell their products through e-commerce giants like Amazon.com, Inc., and eBay Inc., removing the slight tax advantage previously enjoyed by those firms.
Local companies in the U.S. have long claimed that outside rivals and e-commerce giants gained an unfair advantage from the tax break.
“From a competitiveness standpoint, it means that everyone of your competitors has to charge that tax, too,” Atkinson said.
She said the decision could also add new levels of complexity for Canadian retailers, which will soon have to comply with differing tax regimes between states, and pay back those state taxes on an annual, quarterly or monthly basis, raising administrative costs.
The U.S. decision comes after continued battles between bricks and mortar retailers and online retail giants, which have turned the consumer retail market upside down in recent years.
Canadian e-commerce retail sales grew 8.8 per cent in April compared to the year before, according to Statistics Canada, accounting for $1.3 billion in total sales volume over the month, or 2.7 per cent of total retail trade.
South Dakota levelled the suit against online retailers Wayfair Inc., Overstock. com Inc. and Newegg Inc. in a bid to compel those firms to pay state-level sales taxes, which was reviewed by the U.S. Supreme Court. Other e-commerce platforms such as eBay and Etsy Inc. supported the defendants.
The National Conference of State Legislatures estimated that U.S. states had foregone as much as US$17.2 billion in sales taxes in 2016 due to the sales tax loophole. Amazon now pays sales taxes in nearly every U.S. state after facing pressure from Washington, a move that it had long resisted.
Canadian retailers, as a result, have long expected U.S. states to begin imposing those taxes more broadly.
“This has been coming for a while,” said Karl Littler, vice-president of public affairs at the Retail Council of Canada.
“Given the burgeoning presence of online, you can no longer treat this as being anything other than the mainstream swim of retail sales.”