Canadian Sellers With US Inventory: State and Treaty Tax Rules

Does US warehouse stock create sales tax duties in that state?

Owning goods stored in a state can give a Canadian seller physical presence there. California lists inventory as physical presence, and Washington expressly includes stock held by a marketplace facilitator or other third party. Physical presence can trigger sales tax registration and collection without reaching an economic sales threshold (California CDTFA; Washington DOR).

Check where you own stock, not just the warehouse address on your contract. A fulfillment provider can move goods among states, so a single US fulfillment arrangement can create several state reviews. Keep inventory reports that show each state and the dates stock was there. A state's rule still controls whether registration is required, which sales are taxable and who collects. For sales into states where you have no stock, see when you must collect US sales tax.

If a marketplace collects sales tax, do I still register or file?

Marketplace collection generally covers sales made through that marketplace. It does not settle the seller's registration or other tax filings in every state. These official examples show why the warehouse state matters:

Before stopping returns, check whether the state allows you to close your permit. California allows closure when all merchandise sales are through qualifying marketplaces; while a permit remains active, California and Washington require sellers to report facilitated sales and use a deduction or adjustment so the same sale is not taxed twice (California CDTFA; Washington DOR). Keep the facilitator's tax-collection certification and sales reports.

What if I also sell from my own website?

For your own website sales, check both where you hold stock and where each order is delivered. Stock can establish physical presence in its state; a different delivery state has its own collection test. Marketplace collection covers only sales through that marketplace, not your checkout (California CDTFA; Texas Comptroller).

Separate direct from marketplace sales by destination state. The state-by-state sales tax guide handles economic thresholds and other collection rules.

Can US stock trigger state income or franchise tax?

Yes. Sales tax registration and income or franchise tax are separate tests. State business taxes may apply to a Canadian corporation or sole proprietor with local property or sales, even if a marketplace remits every sales tax charge.

For example, a corporation doing business in California can be subject to its franchise tax; California's tax agency also applies property and sales tests to determine whether a corporation is doing business there (California FTB; California FTB). A Canadian sole proprietor with California-source business income may instead need a nonresident individual return (California FTB). Texas applies franchise tax to taxable entities with physical or economic nexus, while Washington taxes qualifying business receipts under its business and occupation tax (Texas Comptroller; Washington DOR). The entity type and each state's law determine the return and tax base.

Does P.L. 86-272 protect a seller with US stock?

Generally not for the state holding the stock. The federal rule limits state net income tax only when in-state activity is confined to soliciting orders for tangible goods, the orders are approved outside the state, and goods ship from outside that state. Orders filled from local inventory fail that shipment condition (15 USC 381). The Multistate Tax Commission's statement also treats an in-state warehouse or stock of goods as unprotected activity.

The statute says interstate commerce. Its application to sales crossing the Canadian border is not automatic; the Commission says states may choose to extend the same protection to foreign commerce. Even when available, it does not protect against sales tax or a tax on gross receipts. Check the law of each state where you claim it (15 USC 381; Multistate Tax Commission).

Does Texas franchise tax apply to my Texas stock?

A Canadian corporation or other Texas taxable entity with stock in Texas can have physical-presence nexus for franchise tax, even if the marketplace collects sales tax. Texas says this also applies when temporary marketplace storage qualifies for the sales tax permit exception. Texas also presumes franchise-tax nexus for an out-of-state taxable entity holding a Texas use tax permit. An unincorporated sole proprietorship is not a taxable entity for this tax; a single-member LLC is (Texas Comptroller: remote-seller FAQ; marketplace sellers; taxable entities).

Texas's published no-tax-due threshold is US$2,650,000, based on annualized total revenue from the entire business, not just Texas sales. A taxable entity at or below it need not file a No Tax Due Report but must file a public or ownership information report. Above it, a taxable entity with nexus must file a franchise tax report and pay any tax due (Texas Comptroller: instructions; filing requirements). Confirm the report year and annualized revenue.

Can Washington charge B&O tax on marketplace sales?

Yes. Washington treats inventory held by a third party in the state as physical presence. A marketplace seller with that presence must register, and marketplace collection of retail sales tax does not remove the seller's business and occupation (B&O) reporting. The seller reports gross Washington retail sales, including facilitated sales, under the B&O classification (Washington DOR: nexus; marketplace sellers).

B&O is based on gross receipts rather than net profit (Washington DOR). Keep the marketplace's gross sales report; a payout after fees is not the same figure as gross sales. Direct and facilitated sales also need separate sales tax reporting so you can claim the facilitated-sales adjustment (Washington DOR).

Does a US warehouse create a permanent establishment under the treaty?

Storage or delivery of your goods alone generally does not create a US permanent establishment under the Canada–US tax treaty. Article V excludes a fixed place used solely for storage, display or delivery, and stock maintained solely for those purposes. A separate rule says an independent agent acting in the ordinary course of business does not, by itself, create one (treaty, Article V).

The answer can change if the US place is used for activities outside Article V's exclusions, or a person there habitually concludes contracts in the Canadian seller's name. If the seller qualifies for treaty benefits, Article VII generally limits US federal tax on its business profits to profits attributable to a US permanent establishment. A corporation's ownership and other facts can affect eligibility under Article XXIX A. The treaty covers specified federal taxes, so its permanent-establishment rule does not cancel state sales, income, franchise or gross receipts obligations (treaty, Articles II, V, VII and XXIX A). For a Canadian corporation's US federal return, see when a Canadian corporation files a US tax return.

Can I credit US state taxes on my Canadian return?

Possibly for a state income or profits tax paid by the Canadian taxpayer, subject to Canada's foreign tax credit limits. CRA says a state unitary tax is not an income or profits tax if it is not based on net business income, and the classification of a particular state tax requires reading that state's law. An annual minimum franchise tax is one example CRA says does not qualify (CRA foreign tax credit folio, paragraphs 1.10–1.11).

Sales tax collected from buyers is not the seller's income tax. Washington B&O is based on gross receipts, which CRA generally excludes from the foreign tax credit. A Texas margin tax needs its own review of its base and the person legally liable; do not assume a credit. CRA allows some formula-based or gross-revenue taxes to qualify only under narrow conditions, and a nonqualifying business tax may instead be deductible in computing business income (CRA folio, paragraphs 1.5–1.12.1 and 1.37–1.38; Washington DOR).

What should I gather before filing?

Start with a state-by-state timeline of where you owned stock and where customers received goods. That lets you test physical presence and sales separately. Gather:

• Inventory locations, quantities and first and last dates in each state, including marketplace fulfillment transfers.
• Gross sales by destination state, split between marketplace and direct checkout.
• Marketplace tax-collection certificates, gross-sales reports and prior state permits or returns.
• Legal entity documents and Canadian and US tax returns, because franchise tax and Canadian credits depend on who legally owes each tax.

If you discover older unregistered periods, use catching up on uncollected sales tax before choosing filing dates.

Example

Illustrative only; all amounts are US dollars. A Canadian corporation owns stock in fulfillment centres in Washington and Texas. It makes US$80,000 of Washington sales through a marketplace and US$20,000 through its own website. The marketplace collects retail sales tax on its sales.

Washington stock gives the corporation physical presence, so it must register and file. It must collect retail sales tax on taxable direct sales delivered to Washington and report US$100,000 of gross Washington retail sales for B&O purposes; the marketplace's collection covers only its facilitated sales. The Texas stock separately calls for a Texas sales and franchise tax review, even if Texas sales are all marketplace sales. Warehouse locations and Washington sales do not decide whether the corporation has a federal permanent establishment; that depends on the treaty activities test. No tax or Canadian credit is computed here.

Different for you?

• You sell into states without US stock: see foreign sellers and US sales tax.
• You need each state's economic sales threshold: see when you must collect US sales tax.
• You missed registrations or returns: see catching up on uncollected sales tax.
• Your Canadian corporation may have a US federal return: see Canadian corporation US tax return. For where goods-sale income is sourced, see when foreign owners owe US tax.
• You need Canadian GST/HST or bookkeeping treatment: see when to register for GST/HST or US-dollar sales and marketplace payouts.
• You are choosing a Canadian corporation, US LLC or US corporation: see US business structures for a Canadian resident.
• Your stock moved through several states, or you have state tax and Canadian credit questions together: gather the records above and seek cross-border tax help.