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Canada: Québec sales tax amendments targeting digital supplies

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On June 12 2018, the proposed amendments to the Act respecting the Québec Sales Tax (QSTA) targeting the digital economy and e-commerce businesses received Royal Assent.

These amendments, which were first announced in the March 2018 Québec budget, are in response to the growth in e-commerce transactions and the difficulties this poses for the collection and remittance of the Québec sales tax (QST). The Québec government has stated that the amendments will level the competitive playing field between Québec-resident and non-Québec-resident businesses. They do this by ensuring that certain businesses with neither a physical presence (permanent establishment) or a significant presence (carrying on a business) in Québec are, as businesses with a physical or a significant presence in Québec, required to register for QSTA purposes, and to collect and remit QST.

As a result of the passage of these amendments, certain non-Québec-resident suppliers who supply incorporeal movable property or services to individuals over a threshold amount will now be required to register for QSTA purposes, and to collect and remit QST (of 9.975%). This obligation will further extend to corporeal movable property in the case of non-Québec-resident suppliers registered in Canada for goods and services tax/harmonised sales tax (GST/HST) purposes. In addition, the registration, collection and remittance obligation will extend to operators of digital platforms that control the key elements of supplies of incorporeal movable property or services made by the non-Québec-resident suppliers.

The amendments are to take effect as of January 1 2019 for non-Québec-resident suppliers with no physical or significant presence in Canada who are not registered in Canada for GST/HST (including operators of digital platforms that facilitate supplies of incorporeal movable property or services of such suppliers); and as of September 1 2019 for non-Québec-resident suppliers who are registered in Canada for GST/HST (including operators of digital platforms that facilitate supplies of incorporeal movable property or services of all other types of non-Québec-resident suppliers).

At the time of announcement there had been concern expressed as to the extra-territorial scope and constitutionality of the Québec government's proposed amendments: notably, given that under subsection 92(2) of The Constitution Act (1867) a provincial government's legislative authority is constitutionally limited to direct taxation within the province.

The recent decision by the Supreme Court of the US in Wayfair v South Dakota, regarding a state's ability to enact legislation requiring out-of-state online retailers to collect and remit sales tax on sales to customers in the state, may be of interest as it concerns the boundaries between provincial and federal authority. In Wayfair, the Supreme Court overturned the long-standing precedents set in Bellas Hess (1967) and Quill (1992), which had established that a business must have a physical presence in a state for that state to require the business to collect sales tax. In its reasoning, the Supreme Court remarked that the expansion of e-commerce had "increased the revenue shortfall faced by states seeking to collect their sales and use taxes" and that the physical presence rule "puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers".

It remains to be seen, if and when called to pronounce themselves on the QST amendments, how willing Canadian courts will be to expand a province's authority to tax businesses outside of the province, and whether in rendering a decision they will be content to water-down, or will instead completely do away with, the physical and/or significant presence requirement (having permanent establishment, or carrying on a business, in the province). Such decisions would likely have an impact on the Canadian federal government, which is presently studying the issue of whether a new digital tax regime is necessary in Canada, and which may ultimately decide to introduce similar amendments in respect of the GST/HST.

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