The direct selling industry poses a number of unique challenges for Canadian sales tax regimes. The patchwork of separate federal GST/HST and provincial PST/QST regimes only further complicates the matter, making it difficult for new entrants to the Canadian market to determine their collection, remittance, and reporting obligations. This article provides a brief overview of the optional sales tax rules available to direct sellers.
Background
Generally speaking, Canadian sales taxes are payable by every recipient in respect of a taxable supply (i.e., a purchaser). In turn, the tax is also collectible by the person who makes the taxable supply. To facilitate this, sales tax regimes have rules which require suppliers to become registered and charge taxes on their supplies once certain conditions are met (e.g., exceeding the “small supplier” threshold).
For most businesses this framework works well enough — but in the direct selling context there is a potentially significant administrative burden on individual participants who would have to monitor their own businesses for potential registration and remittance obligations. This could actively discourage participation in direct selling plans, and complicate CRA’s compliance monitoring of the industry.
Historically, direct selling plans have been divided into “buy-resell” and “sales representative” models, which set out the contractual relationship between plan participants and the direct selling business. In the former, the direct selling business supplies products and services to participants who, in turn, supply same to hosts and customers. Under the latter, the participants supply a service of “arranging sales” to the direct selling company, which then directly supplies the goods to customers.
Under either model, individual participants could potentially be required to register for and collect sales taxes on account of the supplies being made under either arrangement.
Enter the ACM and NSM
Fortunately, there exist optional rules under both the federal GST/HST (and Quebec’s QST), which streamline the application of the sales tax and the potential administrative burden.
The first optional rule is called the Alternate Collection Method (“ACM”), which is designed to operate with buy-resell plans. Under the ACM, on the sale of inventory, the direct selling company charges tax to the participant based on the suggested retail price for the goods (rather than the wholesale price) and remits same. In exchange, the participant is allowed to keep the tax they collect on their resales (rather than remitting it) and is not required to register or file returns. “Sales aids” (which have specific exclusions) and host gifts are further deemed not to be supplies, so they can be sold tax-free to participants by the direct selling company.
Other provinces which have their own provincial sales taxes (i.e., BC, Saskatchewan, and Manitoba) have somewhat similar arrangements to the ACM through legislation or administrative policy – although in the case of BC, their equivalent ACM rules are mandatory.
The second rule is called the Network Seller’s Method (“NSM”) and is designed to work with sales-rep plans, instead. Here, the “arranging sales” services supplied by participants to the direct selling company are deemed to not be supplies, so they are not subject to sales taxes, and the participant is therefore not required to register for or collect tax. The NSM requires a special “joint election” between the participant and the direct selling company, and is subject to more onerous conditions. Similar to the ACM there are also special rules allowing “sales aids” and host gifts to be supplied without tax.
Commentary
These optional GST/HST rules were designed by the Department of Finance in response to requests from the Direct Sellers Association of Canada, and represent a significant streamlining and simplification of sales tax collection for direct sellers and participants. That said, these rules require direct selling companies to apply before they can be used. There are subtle differences in the scope and application of the rules across provinces and how they deal with sales aids and hostess gifts. Direct sellers should seek specialized advice to ensure they are using the collection rules best suited for their business!
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