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US Tax for Canadian Corporation

Asked by: Richard - 10 March, 2013
https://d25eic0jctudgb.cloudfront.net/images/site/avatars/default.png-f1597c1da25f30f8c1a941405e8391c8 I run a Canadian internet business which sells to the US. When a customer purchases a product from the US I then buy it from a warehouse located in the US who then drop ship it to the customer.

Do I need to worry about paying taxes? Do I need a federal tax ID?
Can I get a federal tax ID?
Answered by: Wray Rives - 11 March, 2013
https://d25eic0jctudgb.cloudfront.net/images/site/avatars/1305.jpg-1cc483208a3f52a83fad915f0d4a4521 Richard,

Generally the use of a fulfillment or contract warehouse in the US by a Canadian resident does not rise to the level of having a permanent business establishment in the US and thus making you subject to US taxation under the terms of the US-Canada tax treaty.

Traveling to the US for business or having other permanent business locations in the US would likely change that answer, but if your businesses only connection is the use of a contract warehouse to fill orders, you do not need to file US taxes and thus do not need a US federal tax ID number.

Fortunately the US and Canada have a very good tax treaty and it is relatively easy to define when a Canadian resident is subject to US income tax. Sales tax is much more complicated. The sales tax nexus question revolves around a rather intricate relational issue with the fulfillment house. If the Canadian business has an agency or affiliate relationship with the fulfillment house, then that would create nexus for the Canadian business in the US states where the fulfillment house has nexus.

Affiliate relationship is pretty easy to define because it means there is some form of common ownership or control of the two companies. Think Amazon and its controlled distribution centers. Somewhat more difficult to determine is an agency relationship, because it does not require common ownership or control.

One common factor is the ability of the fulfillment house to enter into contracts on behalf of the vendor. The courts have ruled that even where the fulfillment house did not have the authority to contractually obligate the vendor, there was an agency relationship when the services performed by the fulfillment house was vital to the vendor's ability to establish and maintain sales in the market being serviced. In more layman terms, is the specific fulfillment house critical to the vendor conducting business in the US or are they just providing a common service that the vendor could hire any other company or person to perform.

You may want to have an attorney or CPA review your specific situation to help you determine if you are subject to sales tax in any of the US states.

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