In the ordinary course of business, many Canadian companies have substantial sales in the USA.  A large number of these companies do not have a "permanent establishment" (PE) in the USA.  A PE includes a fixed place of business such as a place of management, a branch or an office.  These companies are exempt from USA  federal income taxes but are required to file an IRS Form 8833 claiming their US-Canada tax treaty exemption.

With respect to state income taxation, it is important to note that individual states also look to impose taxes on Canadian companies.  Generally their basis for imposing tax is based on "nexus" as opposed to "PE". The requirements and threshold for having nexus is generally lower than that of a PE, thus it is possible for Canadian companies to be subject to taxes imposed by individual states while being exempt from taxes imposed by the USA federal government.

Public Law 86-272 overrides the state laws and provides state income tax exemption for companies that merely solicit orders for tangible personal property.  Activities that go beyond solicitation may be enough to subject companies to both income and sales state taxation.  Examples of going beyond solicitation would be warehousing goods within a state, installation or servicing of equipment within a state or even a salesman holding out his home as an office.

The above information is general in nature. Please ensure that you contact Canham Rogers, Chartered Accountants to discuss any specific transactions prior to implementation. We would be pleased to assist you in these and other area’s of your business.