onb webinar - in the cloud & on the ground: tax implications for the us and canada

© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss

entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 1

Opportunities NB Webinar Series

ONB and KPMG: In the Cloud & on the

Ground: Tax Implications for the US and

Canada Host: Heather MacLean

Director of Marketing / Directrice du marketing

Opportunities NB / Opportunités NB



Client-focused, proactive, professional and accountable, Opportunities NB is the first point of contact for local and foreign businesses looking to grow, expand or locate. We are focused on performance, high growth opportunities and growing New Brunswick. Opportunities NB is poised to:

• Support business development inside New Brunswick, including business support services for small, medium-sized and large businesses;

• Proactively pursue high growth opportunities through exports and foreign investment; and

• Work with industry partners, economic development stakeholders and public sector partners to identify, build and support a portfolio of significant high growth opportunities both within and outside the province!

We will offer you the ideal operational expansion and labour solution tailored to your needs to grow in New Brunswick. We will go above and beyond to ensure your success in the province.

New Brunswick is built for business. We look forward to working with you to grow your business.



Our guest

Candace Sears Senior Manager and leader of KPMG’s New

Brunswick US Tax Practice

Candace Sears, CPA, CA, MBA

Senior Manager

KPMG in Canada

T: +1 506 453 7367

E: [email protected]

Canadian, US, and Cross Border Taxation

In the Cloud & on the Ground

KPMG in Canada

Tax

kpmg.ca/tax

November 17, 2016



Agenda

Topics

1. Cloud Based Businesses

2. Sales Tax

3. US Election Impact Predictions



Exporting – By the Numbers

US Exports Pay Off

45% of companies have

already deployed or are

evaluating cloud services (1)

FAST FACTS

$4.1 trillion in retail and

wholesale transactions

over the internet in 2010

(2)

FAST FACTS

26% compounded annual

growth expected for cloud

revenue (1)

FAST FACTS

Almost one in five Canadian

jobs is dependent on trade

with the United States

FAST FACTS

(1) Retrieved November 15, 2016 from Global Information Security Survey

(2) Retrieved November 15, 2016 from http://www.forbes.com/sites/robertwood/2012/09/11/10-surprising-facts-about-online-sales-taxes/#65ca2aa55f2f


entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 7 © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative

(“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks o f KPMG International. 7

Cloud Based Businesses



US Federal Taxation – In Brief

1) US Trade or Business Required – Low Threshold

Sale of Services

For Federal purposes – sale occurs where service

Is performed

Sale of Products

For Federal purposes – sale occurs where

ownership changes hands

2) Canada-US Income Tax Convention (Treaty)

will protect a Canadian company from US taxation

unless it has a Permanent Establishment (PE) in the US

A fixed place of business

Doesn’t include a warehouse (& other exceptions)



US State Taxation – In Brief

1) Sourcing of Sales to a State

Sale of Services

Sale occurs where service

is enjoyed (location of customer)

Sale of Products

Sale occurs where product

is delivered (location of customer)

2) Sufficient Nexus in a State

A certain threshold of sales

Employees present in the state

Delivering vehicles to the state in trucks

Having a warehouse in the state




Software as a Service

The customer uses software that are accessible

via a browser or a program interface. The

customer does not store or make copies of

the software.

Platform as a Service

The consumer is able to deploy applications

of their own onto cloud infrastructure using

programming tools supported by the provider




Infrastructure as a Service

The customer is provided the capability to

process, store, network, and perform other

fundamental computing functions on hard

ware owned by the provider. “Server Farms”




Example: Agent Relationship (Amazon)

Federal

Profit oriented activities create a US trade or business – can be directly, or

through an agent.

Treaty protection may apply to protect from taxation

Consider whether permanent establishment exists

State

A product or service is sourced to the customer’s location – US

Consider whether sufficient presence exist to create nexus




Server Location - Federal

It could be argued that a server is where services are

performed if significant computing & interacting with

customers is done there.

This would create a trade or business in the US for services

It could be argued that a server is where ownership changes

hands if this is where the customer approves the payment

agreement and terms and conditions.

This could create a trade or business in the US for products.

Then consider whether a Permanent Establishment exists

• Could the server be considered a warehouse holding inventory?




Server Location - State

In all cases, the service is enjoyed or the product delivered

to the location of the customer regardless of where the server

is located.

The server is a physical asset in a state, which can give rise

to Nexus.

Then consider whether any exemptions to Nexus exist

• Warehouse exemption is not available for state purposes

• States apply nexus whether servers are owned or rented



Example

Software as a Service

Software is accessed from the US on a

server located in Canada. Ownership never

transfers.

• Tax rules are around services

• Federal taxation based on where service

is performed (server or corporate offices)

• State taxation based on where service is

enjoyed

Federal trade or business – No

State trade or business - Yes

Software as a Product

A pre-packaged cd containing software is

sold to a client.

• Tax rules are around products.

• Federal taxation based on where

ownership transfers.

• State taxation based on where product is

delivered.

Federal trade or business – Maybe




Example

Software as a Product (CD)

A pre-packaged cd containing software is

sold to a client

• Tax rules are around products

• Federal taxation based on where

ownership transfers


delivered

Federal trade or business – Maybe


Software as a Product (Download)

Software is available for digital download

from a website on a server in Canada, after

which it is the property of the customer

• Tax rules are around products

• Ownership transfers where product is

downloaded (the server)


delivered

Federal trade or business – No





On the Ground – Sales Tax



What Do We Know?

A tax measured by gross receipts

There is no national-level sales tax, instead states, counties, or cities, levy

their own.

Sale of products vs. services

Some states offer exceptions for sales to manufacturers or resellers

Burden is on the seller to collect and remit

Canadian companies are not protected by the treaty

18



What Do We Know?

Physical presence (for now), or substantial nexus, is required to establish

sales and use tax nexus

Indirect physical presence may also create nexus

• Some representatives create nexus on behalf of an out-of-state seller

• Internet sales caused pressure from in-state retailers to expand what cloud

sales cause nexus

19



Where is a Transaction Sourced?

Place of delivery

• Wherever delivered to customer

• Regardless of method (common carrier, merchant trucks)

• Shipping terms usually irrelevant

• Delivery to common carrier that is agent of purchaser may be problematic

Place of Transaction

• Transfer of possession

• Destination

• Origin

• Where benefit of the service is received versus where the service is performed

20



Approaches to Nexus Expansion

Click-through legislation (New York and others)

Presumption of nexus is generally established when an in-state person posts a link to a

retailer’s website on its own website; the in-state person receives a commission or other

consideration for sales made through the link

Ex: Hockey club website links to Amazon to raise funds

Affiliate nexus legislation (California and others)

Activities of related parties may create nexus for affiliate entities

Ex: In-state retailer accepts returns of books purchased from Internet affiliate

Attributional nexus (Colorado and others)

Activities of unrelated parties may create nexus for a company

Ex: In-state contractors fix computers that were purchased over the Internet

21



Approaches to Nexus Expansion: “Click-Through” Nexus

New York

Seller presumed to be soliciting business if seller enters into agreement with a New York

resident

Must demonstrate that in-state resident did not engage in any solicitation activities to be

exempt

Connecticut

Statute requires over $2,000 in sales from the State to be subject to law

Statute is not framed as a rebuttable presumption of nexus, but rather asserts nexus if

statutory conditions are met

Rhode Island

Statute requires over $5,000 in sales from click-through to be subject to law

22



Approaches to Nexus Expansion: Click-Through Nexus

23

Enacted

Arizona North Carolina

California Ohio

Connecticut Pennsylvania

Georgia Rhode Island

Illinois Tennessee

Kansas Vermont

Maine Washington

Michigan

Minnesota

Missouri

Nevada

New Jersey

New York

Proposed

Florida

Hawaii

Indiana

Iowa

Louisiana

Maryland

Mississippi

New Mexico

South Carolina

Texas

Virginia



Approaches to Nexus Expansion: Affiliate & Attributional Nexus Entities are in a similar line of business

In-state and out-of-state entities are related parties that are in the same or similar line of

business, sells similar products, uses similar marks, etc.

In-state entity is an affiliated distribution facility

In-state entity performs other services (installation, advertising,

accepting returns, etc.) on behalf of the out-of-state entity

Out-of-state entity is a member of a commonly controlled group that

has a component member that is a retailer with nexus in the state

California also requires that the in-state member perform certain services on behalf of the out-

of-state entity, including product development or solicitation

24



Statute of Limitations

Number of years varies by state (e.g., three vs. four)

Starting point

— Date of return

— End of year in which tax was paid

May also vary between statutes for assessment and for refunds

Assessments: generally based on date the tax is due — “An action to recover admissions and amusement tax, boxing and wrestling tax, motor fuel tax, or sales

and use tax may not be brought after 4 years from the date on which the tax is due.” Md. Code Ann.,

Tax-Gen. § 13-1102

Refunds: generally based on the date paid — “The Comptroller shall deny any request for a refund received more than 4 years after the tax was paid by

the applicant to the Comptroller or to a licensed tax collector.” Md. Code Regs. 03.06.03.05

Statute of limitations on assessments typically does not start running if

returns have not been filed or if the return was fraudulent

25




US Post-Election



Expectations

Oil

Tax Cuts

Immigration

Other




Questions




Opportunities NB Webinar Series Tel: 1.506.453.5471

Toll free: 1.855.746.4662

Email: [email protected]

Upcoming:

CETA Market Symposium

Creating Jobs and Economic Opportunity for New Brunswick Scheduled

for November 21st in Saint John, NB

Thank you

© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of

independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a

Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks of KPMG International.

Any Tax advice in this communication written by KPMG LLP is not intended or to be used, and cannot be used,

by any person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (iii)

promoting, marketing or recommending to another party any matters addressed herein.

This presentation may contain a discussion or analysis of decided tax cases. Any discussion or description of

the facts of the case or the positions argued by the parties is based solely on publicly available information. For

greater certainty no confidential client or taxpayer information is disclosed.

This information is current to February 21, 2016. The information contained herein is of a general nature and is

not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide

accurate and timely information, there can be no guarantee that such information is accurate as of the date it is

received or that it will continue to be accurate in the future. No one should act on such information without

appropriate professional advice after a thorough examination of the particular situation.

kpmg.ca/tax

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Q&A / Q&R



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onb webinar - in the cloud & on the ground: tax implications for the us and canada

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