Quebec’s New Online Sales Tax Rules

Could the Quill effect be “reaching”  north of the border?  Quebec announces new online sales tax rules

Canada has always been a top trading partner with the US, and therefore, many US MNCs do lots of business in Canada.  That means of course that the tax rules in Canada have a direct impact here on companies in the states—especially states that are close to the US-Canadian border.  This also means that only providers of sales and use tax software solutions with the greatest global tax depth and reach can be in lock step with the sales tax rules of Canada.

The mighty pen of Quill reaching out in Quebec Canada… Really?

If a recent announcement by the government of the Canadian province of Quebec is any indication, the answer may be yes…at least indirectly.  The Quebec Government has announced that it will require its sales tax (QST) to be collected on services and incorporeal property sold from abroad. The measure was announced as part of the province’s 2018 Budget.

The measure requires companies in the rest of Canada (as of Sept. 1, 2019) and foreign countries (as of Jan. 1, 2019) that sell digital services to Quebecers to register with the government and pay QST once they pass $30,000 a year in revenue from Quebecers.  The government hopes to raise $154.5 million in additional sales tax revenue over the next five years, well below the estimated $226.8 million a year in taxes from foreign suppliers that went uncollected in 2017, according to a Revenue Quebec estimate.

Minister of Finance Carlos J. Leitão delivered Budget Speech 2018-2019 on March 27, 2018, in which he said,

“…I am proud to announce today that we are strengthening tax fairness by bringing collection of the sales tax in line with the new economy and by stepping up the fight against tax havens.  This is a commitment I made before the Committee on Public Finance last November. I am announcing that we will require sales tax to be collected on services and incorporeal property sold from abroad. I am also announcing that for all property and services from elsewhere in Canada, the Québec government will require suppliers that do not have a physical or significant presence in Québec to collect the sales tax. I am counting on the cooperation of the other parties to ensure that both of these legislative measures, on which there is consensus among Quebecers, are passed by the National Assembly rapidly.  With respect to corporeal property from abroad, we have secured commitments from the Canada Border Services Agency that the collection of sales tax at the borders will be more effective. In the coming weeks, a pilot project will be implemented to improve the parcel processing capacity of Canada Post’s sorting Centre in Montréal…” [www.budget.finances.gouv.qc.ca/budget/2018-2019/en/documents/speech_1819.asp]

Nexus… Nexus… Nexus:  Around the world

The above reference to “physical presence” and “significant presence” should ring a bell with readers who have tracked our many blogs and white papers on the upcoming review by the US Supreme Court in the Wayfield case [cert. granted 1/12/2018, No. 17-494] of the physical presence nexus standard that it laid out in Quill [504 U.S. 298 (1992)] way back in the early 1990s.  And while it is obvious that what the Court decides in that case has no direct effect in Canada and other countries around the world, it is worth noting that the very same of issues of nexus brought into sharp focus by the advance of technologies such as ecommerce, cloud computing, and the internet of things, are the very same issues under scrutiny in Canada (by the action in Quebec) and frankly around the world (See for example the OECD BEPS Action Item No. 1. “Addressing the Tax Challenges Arising from the Digital Economy “) [www.oecd.org/ctp/addressing-the-tax-challenges-of-the-digital-economy-action-1-2015-final-report-9789264241046-en.htm]

Quick review of current rules

Currently, there are no special rules under the QST system for online transactions. That being so, the general rules under the system apply to e-commerce.  Consequently, as in the case of supplies made according to the traditional transactional model, supplies of movable property or services made over the Internet are generally subject to the QST if the property or services are supplied for consumption in Québec (destination principle), regardless of whether the supplier is located in Québec, elsewhere in Canada or outside Canada.  However, suppliers that make supplies of taxable movable property or services over the Internet in Québec are generally required to register for the QST, for the purpose of collecting the tax and remitting it to Revenu Québec, only if they have a physical presence (permanent establishment) or a significant presence (carrying on of a business) in Québec.  The context of the digital economy poses application-related difficulties respecting the collection of the QST by suppliers with no physical or significant presence in Québec.  And that is the problem that Quebec hopes to “fix”.

What are the new proposed rules in brief?

The Quebec Government intends to implement a new registration system. A mandatory registration requirement will apply when the value of taxable supplies made by the supplier in the province exceeds CAD30,000 (USD23,297). The requirement to register will also apply to digital property and service distribution platforms.

Under the new regime, suppliers with no physical or significant presence in Quebec will be required to collect and remit the QST on taxable incorporeal movable property and services they supply in Quebec.

In addition, suppliers that are located elsewhere in Canada but have no physical or significant presence in Quebec will be required to collect and remit the QST on taxable corporeal movable property they supply in Quebec.  For more details, see the KPMG report at [assets.kpmg.com/content/dam/kpmg/ca/pdf/tnf/2018/ca-highlights-of-the-2018-quebec-budget.pdf]

What are companies doing business in the US and Canada to do?

Companies doing business in the US and Canada must keep pace with these rapid changes in sales tax rules in these countries in order to meet the demands for timely compliance and provisioning.   That means that they must find software solutions that can be seamlessly and quickly implemented by companies with the greatest depth of global sales tax technical and legal expertise.    For more information on how that can be done visit www.SalesTax.com