US Supreme Court ruling lays ground for Canadian tax modernization

The new decision sets an important precedent for the taxation of online businesses

US Supreme Court ruling lays ground for Canadian tax modernization

A landmark ruling by the US Supreme Court could pave the way for Canada to modernize its tax system for digital companies.

“The court overturned a 26-year-old precedent and ruled that a state can require sales taxes from companies with no physical presence in the state,” explained Ivan Ozai, a doctoral candidate and member of the Faculty of Law at McGill University, in a piece published on The Conversation.

The ruling applies only to US companies and consumers. But according to Ozai, the court’s decision lays a foundation to tax digital companies around the world based on “virtual presence” — that is, based on where their customers are rather than where the company is located. It also flies in the face of US opposition to attempts by other countries to tax American digital service providers.

Leaders in the Canadian government have adopted different stances on the issue of digital taxation. From the viewpoint of Prime Minister Justin Trudeau, taxing foreign web giants like the FAANG companies could increase digital service costs for Canadians. Finance Minister Bill Morneau has been more reserved, saying the federal government is studying the issue and will observe “how the international community is going to think about digital taxation.”

Quebec, meanwhile, has already announced that it is requiring foreign digital suppliers to register and collect sales taxes starting next year. The province, as well as some others in Canada, has actually had a sales tax on digital services for years; however, its dependence on users to self-report their dues has limited its effectiveness.

While the US Supreme Court decision could be the cornerstone for a new tax system for the digital economy, Ozai said, constructing the system will be challenging. Even after countries around the world hammer out a consensus on whether and how the digital economy should be taxed, governments will likely struggle to effectively enforce compliance, particularly among foreign companies.

“Likewise, some form of agreement between countries will likely be necessary,” Ozai said. “The lack of an agreement could result in companies having to comply with completely different rules for each government or suffering double (or more) taxation.”