Many carriers are happy to accept the restrictions on cabotage and would rather not go to the trouble of establishing domestic U.S. operations.They obtain U.S. operating authority expecting to engage ...
Many carriers are happy to accept the restrictions on cabotage and would rather not go to the trouble of establishing domestic U.S. operations.
They obtain U.S. operating authority expecting to engage solely in U.S.-Canada international transportation.
However, they need to know there may be more consequences than they expect.
In particular, they may be subject to taxes in the U.S. – even if they confine activities strictly to international transportation.
The culprit is not the U.S. federal government; the tax treaty with Canada is quite clear in stating the U.S. government cannot impose an income tax on the business activities of Canadian carriers engaged in international commerce.
The problem is with the individual states.
This may be more troublesome to Canadian carriers, because there are 48 states in the continental U.S., but only one federal government.
This leads to two questions: What is the legal basis for state taxation?
And, why can a state do what the federal government can’t?
The legal basis for state taxation of international carriers is founded in the concept of “doing business.”
Just as the federal government cannot tax Canadian international transportation activities, an individual state can’t tax the inter-state activities of any carrier, regardless of whether it is Canadian or American.
On the other hand, if a carrier has sufficient contact with a particular state, the state can take the position that the in-state activities predominate, subjecting the carrier to taxation.
The issue is the dividing line between interstate and in-state activity.
In the transportation industry, the key factors are the number of pickups and deliveries in the state, and the number of overall miles driven in the state.
The logic behind the rule is that a pickup or delivery is a local, rather than inter-state, activity.
A sufficient number of local activities moves the carrier outside of the protective arena of inter-state commerce.
There is no general rule that can be applied to every state – some states have very small thresholds, such as one or two pickups or deliveries, while others don’t even bother to try to impose a tax of this nature.
In between are states with a modest number of local activities, coupled with a minimum number of miles driven within the state.
The purpose of this article is not to delineate the rules for each state, but rather to let the Canadian carrier know it has to evaluate its routes and its scope of U.S. activities, to be able to evaluate the potential cost of conducting international business.
How can the states do something that the federal government cannot?
The U.S.-Canada Tax Treaty is based on the principal a business should not be taxed twice on the same income, once in Canada and once in the U.S.
The Tax Treaty rules, on both an individual and corporate scope, are designed to eliminate duplicate income taxation, either by establishing credits for tax paid, or, as with Canadian motor carriers, creating an exemption from tax.
In contrast, individual states are not subject to any similar treaty.
Moreover, the states do not impose an income tax on Canadian carriers.
The tax is generally a corporate franchise tax. Since the corporate charter or “franchise” is a creation of the state, an entity cannot operate as a corporation in a state.
That is, unless, one, it is chartered by the state, or two, in the case of out-of-state corporations, it is granted the privilege of being allowed to operate as a corporation within the state.
Any corporation with sufficient connection or “nexus” with a state, may therefore be subject to a franchise tax.
The calculation of tax liability also varies from state to state, and can be based on things such as revenue, net income or the value of capital (equipment) allocable to the state.
Most allocations are done on the basis of miles driven within the state, as a percentage of miles driven everywhere else.
So be aware that purely international transportation may still require a carrier to file tax returns and pay taxes south of the border.
Make sure you know your exposure before you set your game plan for moving in on the lucrative U.S. market.
– Daniel Joyce can be reached at Hirsh and Joyce, Attorneys at Law, at 716-564-2727.