Will Wayfair Affect the Collection of Canadian Tax from Remote Sellers?

In South Dakota v. Wayfair, Inc. (585 US (2018)), the US Supreme Court upheld a South Dakota law that required out-of-state remote sellers that met certain sales thresholds to register for, collect, and remit state sales tax, whether or not the sellers had a physical presence in the state. This ruling is important news in the United States: it overturns the court's previous decision in Quill Corp. v. North Dakota, 504 US 298 (1992). But what effect will it have in Canada? I suggest that it will have two possible impacts: (1) Canadian firms may now have to involve themselves with sales tax in states where they have no physical presence, and (2) Canadian legislators and tax authorities may be influenced by the court's commentary on the competitive disadvantage that physical-presence rules cause domestic sellers.

On the first issue, the extent of Wayfair's applicability to Canadian firms is unclear. The taxpayer in Wayfair was a US out-of-state remote seller and, since the court offered no commentary on states' jurisdiction to impose sales tax rules on foreign sellers, it is not obvious whether the court's ruling extends beyond the US border. It seems unlikely, however, that states will be content to tax remote sellers in the United States but not elsewhere; the states may attempt to force Canadian sellers to register, collect, and remit state sales tax.

On the second issue, Wayfair may contribute to the ongoing Canadian discourse on remote sellers' tax obligations, which was instigated by Quebec's proposal to compel non-resident suppliers of e-commerce to register for, collect, and remit QST. Anything that highlights the unfair competitive disadvantage that domestic sellers experience as a result of "online sales tax loophole[s]" (as Wayfair does, page 9) is likely to have some impact on this discourse. Indeed, to the extent that the issue is publicized, Canadian governments may be pressured to consider action to protect domestic sellers, even if domestic consumers will not be happy.

Nevertheless, Wayfair involved legal issues unique to the US context, so it may not be possible to directly apply the case to Canada. Unlike the former Quill rules, Canada's sales tax rules do not require physical presence per se. Instead, the Canadian test (for federal GST/HST, for example) is whether a firm "carries on business" in Canada, which is a much more flexible standard than the one in Quill. (Provincial rules may differ.)

Two main tests to determine whether a non-resident is carrying on business in Canada are set out in the Canadian case law (Grainger & Son v. Gough (1896), 3 TC 462 (HL), and F.L. Smidth & Co. v. F. Greenwood (1922), 8 TC 193 (HL)). The tests look to the place where a non-resident's contract was formed and the place where the non-resident's profits arose to determine where the non-resident carried on business. Neither test turns on physical presence in the sense of the Quill criteria—employees or real estate.

Although it is not a tax case, Equustek Solutions Inc. v. Jack (2014 BCSC 1063) illustrates how "carrying on business" could apply to e-commerce. The court found that Google carried on business in British Columbia because the company remotely engaged "in the business of selling advertising space on the internet to other companies in British Columbia" (paragraph 52). Subsequently, the BCCA (2015 BCCA 265) and the SCC (2017 SCC 34) deferred to this finding of fact. Thus, it appears that Canadian courts have already started to look beyond physical presence to deal with the challenges of e-commerce.

Nicholas Shatalow
Thang Tax Law, Toronto
[email protected]

Canadian Tax Focus
Volume 8, Number 3, August 2018
©2018, Canadian Tax Foundation