The ideal of "free trade" in North America has clearly had a positive - albeit indirect - effect on the Canadian trucking industry. Truckers have seen an explosion of transborder freight. And in a rel...
The ideal of “free trade” in North America has clearly had a positive – albeit indirect – effect on the Canadian trucking industry. Truckers have seen an explosion of transborder freight. And in a relatively small economy like Canada’s, we need to generate our wealth through trade.
While this experience has been positive, there are a number of issues – usually involving individual states and provinces – that still fall outside of NAFTA. It has also become clear that the Canada-U.S. Tax Treaty – which did not contemplate free trade agreements – does not protect Canadian businesses from a growing form of quasi-income tax levied by many individual states.
In recent years, more and more Canadian motor carriers have opened their mail and received a warm welcome from states like New York, Michigan, Ohio and Pennsylvania. The warm and fuzzy feeling soon fades, however, when carriers are informed that one of the perks of operating into, out of, and through the state is the privilege of paying a special form of tax, variously known as a franchise, gross receipts or a single business tax. Often, these taxes are being levied retroactively. In other words, carriers are asked to pay back taxes for multiple years, plus penalties and interest.
No similar taxes exist in any Canadian province.
Franchise taxes are a non-traditional form of taxation. They are not really income taxes, nor are they true value-added taxes in the sense of the GST. As such, they do not technically qualify for foreign tax credits for the purposes of Canadian corporate income tax. As a result, Canadian carriers face double taxation. They pay tax on the same revenue to both Canada and to the appropriate state. That’s a no-no when it comes to tax policy. (U.S. carriers are not double-taxed since most states have entered into reciprocal agreements that ensure a carrier only pays once, and tax revenues are apportioned amongst the states).
The starting point for most franchise taxes is federal taxable income that is computed under the provisions of the United States Internal Revenue Code. Various state laws then prescribe specified modifications, or payback provisions, to arrive at the amount of tax that has to be paid. For example, wages to employees and depreciation are added back to a company’s net profit, to increase the tax base.
Almost all states have some form of franchise tax. More than 50 per cent of these states require Canadian trucking companies to file for simply traveling on state highways. (Remember that Canadian-based carriers already pay for the right to use these roads, through the International Fuel Tax Agreement, the International Registration Plan and other third-tier taxes). A number of state governments, particularly in the Northeast, have begun targeting Canadian trucks as a source of additional non-income-based tax dollars. And why not? The voters at home are not likely to object to foreign truckers being dinged.
These taxes have been a problem in the trucking industry for more than a decade. Canadian trucking associations have mounted different challenges to these types of taxes. The Ontario Trucking Association (OTA) spent seven years fighting the New York State franchise tax in the courts. The case went as far as the New York Supreme Court before a settlement was reached. New York also amended its tax legislation to reduce the impact of the tax, but many Canadian carriers are still unaware that the tax exists.
However, the trucking associations had been fighting against these taxes in relative obscurity. It wasn’t until Michigan announced last summer that it had changed its policy and would commence applying the Single Business Tax to Canadian business, including automotive and parts manufacturers, that people really began to take notice.
Chartered accountants Deloitte and Touche recently completed a study that examines the application of franchise taxes on Canadian trucking companies. And its findings are scary.
Deloitte and Touche reviewed all sources of possible relief from such taxes but found that the traditional mechanisms of tax apportionment, foreign tax credits and treaty relief will generally not be enough to help Canadian motor carriers without a permanent site in the U.S. to avoid double taxation. The accountants noted that Canadian business has an “over-extended sense of comfort from the provisions of the Canada-U.S. Tax Convention” and that non-traditional, non-income based taxes that have become more popular in the U.S. will create a competitive imbalance among competing U.S.-Canadian companies.
A Canadian-based truck operator is likely to face an additional tax burden of seven per cent, compared to a like U.S.-based trucking company.
To add insult to injury, tax officials in at least one of the states have suggested the solution for Canadian carriers would be to relocate in the state and avoid this double taxation.
What can be done? The Canadian trucking associations are fighting hard to try and win some relief from the individual states to make the taxes more reasonable. And we are receiving good support from Canadian trade officials in both levels of government.
At the same time, there is a responsibility and role for our own governments with regards to the way they tax transportation. While no one wants to say the “R” word, there is increasing talk of retaliation. Indeed, that might be our only choice if the states will not co-operate. The Deloitte and Touche study also points towards some other measures that definitely need to be considered. The provinces should review their own definition of what constitutes a “permanent establishment” for the purposes of taxation.
At the same time, the Canada-U.S. Tax Treaty should be reviewed and re-opened so that it addresses and harmonizes the application of provincial and state taxes of international transportation. And, NAFTA itself should be reviewed so that the principle of national treatment is also binding on state and provincial governments. n
– David Bradley is the president of the Ontario Trucking Association, and chief executive officer of the Canadian Trucking Alliance. His column appears monthly in Truck News.