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SPECIAL SALES TAX RULES FOR DIRECT SELLERS

Sales tax in Canada can be complex – especially in provinces that do not participate in the GST/HST harmonization system. This complexity becomes even more pronounced in industries that do not follow the typical retail model, like direct selling.  This blog explains how Canadian sales tax systems apply to the direct selling industry, and how special rules can help businesses streamline compliance.

Background

Under Canada’s standard sales tax rules, any person making taxable supplies over a certain threshold must register for GST/HST and provincial sales tax (where applicable), collect tax from customers, and remit it to tax authorities.  In a typical retail setup, the business itself tracks its revenue and ensures compliance.  But in a direct selling network, each participant may independently meet those thresholds.  Requiring every participant to track earnings, register, charge tax, and file returns would create a massive administrative burden and could discourage participation.

Fortunately, the federal government and certain provinces have specific rules for direct sellers.  These rules generally allow direct seller companies to take on tax responsibilities centrally so individual participants do not have to account for sales taxes themselves.

Special Collection Methods

To reduce compliance burden in the direct selling industry, special collection methods are available under both the federal GST/HST regime, Quebec QST, and certain provincial sales tax systems.

At the federal level (and in Quebec), direct sellers may apply to use either the Alternate Collection Method (the “ACM”) or the Network Sellers Method (the “NSM”).

The ACM applies where participants purchase products for resale.  In such cases, the direct selling company charges and remits tax on the sale to participants based on the suggested retail price.  This relieves participants of the obligations to register or remit tax on their sales.  The NSM applies to sales-representative models - The participants’ sales services are deemed not be a taxable supply, meaning they are not required to register or remit tax on commissions.

ACM-equivalent rules exist under certain provincial sales tax regimes.  In BC, the ACM-equivalent approach is mandatory for direct sellers: the company remains responsible for PST collection, and participants are excluded from registration and remittance obligations.  In Manitoba, the same approach can be used, but only upon application and approval from the province.  In Saskatchewan, while not provided in the legislation, our experience indicates there may be an administrative program similar to the ACM rules.

Although these special rules aim to simplify compliance, their application depends on the specific structure of each direct selling plan. Questions often arise regarding the treatment of sales aids, host gifts, or personal purchases by participants. Additional complexity can arise when participants act in multiple roles – for example, both reselling products and earning commissions. Given these nuances, direct sellers should carefully assess how their plan align with the rules and consider seeking professional advice to ensure proper compliance.

Takeaways

Special sales tax rules can significantly reduce compliance burdens for participants of direct seller networks. Most of these rules require an application and approval. It is important for businesses to understand which rules apply to their specific model and to seek expert advice to ensure proper application.  

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