Direct sellers are in the business of marketing and selling products through organizations of individuals in direct contact with consumers in their community.
Some direct sellers sell their products to contractors, who resell these products to consumers at a mark-up (a "resale model"), while others pay commissions to a network of sales representatives, who sell the products on behalf of the direct seller (the "commission model").
Since the early 1990s, there have been rules simplifying the Goods and Services Tax/Harmonized Sales Tax ("GST/HST") accounting for direct selling organizations under the resale model. The Federal Government has announced new rules to similarly simplify the accounting of direct selling organizations operating under the commission model in its Budget on January 27, 2009.
Background to the GST/HST
The GST/HST is a value added tax imposed on most supplies of property and services made in Canada. The GST is imposed at a rate of 5% throughout Canada, except in certain Atlantic Provinces where the HST is imposed in its place at a rate of 13%.
As a creditable or multi-stage tax, the GST/HST is charged and collected between most commercial parties. However, in most instances the tax is fully recoverable to the payor by virtue of its registration for GST/HST purposes. As a consequence, the economic cost of the GST/HST is intended to be borne by the end consumer.
To limit compliance obligations, so-called "small suppliers" with under $30,000 in sales per year are not required to be GST/HST registered, nor to charge and collect GST/HST. However, small suppliers also are unable to recover GST/HST on inputs into their businesses.
Existing Rules for the Resale Model
There is an alternate collection method for direct sellers under the resale model that requires the direct seller to collect GST/HST from the contractor calculated on the suggested retail price of the product to the consumer, rather than on the sale price to the contractor, as would be the case under the ordinarily rules. The direct seller remits this GST/HST to the government.
There have been several benefits to paying the GST/HST on the final sale price to the consumer. Contractors have not been obligated to remit GST/HST on their sales to consumers. In addition, supplies of sales aids, such as documentation, samples, demonstration kits, instructional items and catalogues, as well as host gifts by a direct seller to its contractors, have not been subject to GST/HST. As a consequence, contractors generally have not been required to be registered, nor motivated to be registered, for GST/HST purposes, which has lessened their compliance obligations.
Until the Budget, direct sellers operating under the commission model have not had available to them a similar alternate collection model.
New Rules for Network Sellers under a Commission Model
The new rules provide a modified alternate collection method for network sellers. These new rules will apply to network sellers operating under a commission model for any fiscal year of the network seller beginning in 2010 or later.
The sale of products by the network seller to the consumer will continue to be subject to the GST/HST under the normal rules. As a consequence, GST/HST is collected on the sale price to the end consumer.
The alternate collection method provides for commissions and bonuses paid by a network seller to its sales representatives to be free of GST/HST. Moreover, these commissions and bonuses are ignored for purposes of determining whether sales representatives are required to register for GST/HST purposes. This will permit many sales representatives to come under the small supplier threshold of $30,000 in taxable supplies per year, such that many sales representatives may elect to deregister for GST/HST collection purposes as a consequence. In addition, supplies of sales aids made by network sellers to sales representatives will no longer be subject to GST/HST, nor will supplies of host gifts to sales representatives, nor by sales representatives to hosts.
In order to qualify for the alternate collection method, the network seller must jointly elect with all of its sales representatives, and any new sales representatives, to use the proposed method. A network seller generally will be entitled to elect to use this alternate collection method if:
- the network seller is GST/HST registered,
- all or substantially all of the network seller's sales are expected to be made through sales representatives, or through a combination of sales representatives and contractors where the network seller operates under a mixed commission and resale model;
- all or substantially all of its sales representatives are expected to receive commissions and bonuses from the network seller of less than $30,000 such that they could qualify as small suppliers and deregister for GST/HST purposes; and
- all or substantially all of the sales of the network seller are to final consumers.
To qualify, the network seller must apply to the Canada Revenue Agency for permission to proceed on this basis.
If the Canada Revenue Agency determines that a network seller has not complied with one or more of the conditions of the election in a fiscal year, the network seller will be required to make an adjustment to the network seller's GST/HST net tax.
Adjustments will also be required if a network seller fails to notify its sales representatives that the election has ceased to have effect.