Tax law aficionados? We're stumped.

[GirlinContempt]

Anyone who has any thoughts or info is welcome...

We're a Canadian company that rents goods (costumes) to American not for profits, primarily universities.
They are Canadian goods that remain in the US for a short period, and then are returned to Canada.

Recently, a large customer of ours has informed us of a tax law. Unfortunately, I don't have the info in front of me, but I'll get it. The law states that foreign businesses renting in the US must have 30% of their profits withheld and submitted to the IRS. The way the whole thing reads, it sounds more like if a Canadian company owned say, a property in the US and was renting it, or some such thing. However, the university is now saying they have to hold back 30% of our payments under this law, despite no one being sure of the meaning of it.

We're a small business that can barely afford to continue shipping to the US with the increase in the Canadian dollar, we cannot pass on higher prices to our US customers as they cannot afford it and don't understand. The loss of 30% on top of the nearly 30% revenue loss would be impossible to cope with. Even though we may be able to recoup the 30% from the IRS, we'd have to hire a US tax attorney and go through a costly time consuming process that may still not get us the money back.

I'm really REALLY just hoping someone is familiar with tax law or has some resources. We've been making phone calls and trying to ask these questions, so far with not much luck. We don't have a lot of time. If we can't resolve this, we can't ship to our customer. If we can't ship, we lose them. And if we lose them.... it's just a bad scene.

Anyone?

[Zorro]

1. Title 26 of the United States Code

That's where you'll find all the tax law.

Have fun.

[GirlinContempt]

2. I've read the law

I just can't figure out if/how it applies :(

[Suich]

3. My sister is a Canadian citizen.

When my father's estate (he was a US citizen) was settled and payments were made, there was a considerable sum withheld from her checks and not mine. I don't know what happened but I know she either talked to a tax lawyer or accountant. Good luck!

I hear you're having some wicked cold weather there!

[GirlinContempt]

4. See, and that sort of makes sense

because it was american property to begin with, while this is not. But, I am not a tax lawyer :D

Today it is -37 with the windchill, so about -34F. Brutal today. Yesterday wasn't so bad though.

[MrCoffee]

5. 26 USC 1441(a), to be precise...You need a CPA.

§ 1441. Withholding of tax on nonresident aliens
(a) General rule
Except as otherwise provided in subsection (c), all persons, in whatever capacity acting (including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States) having the control, receipt, custody, disposal, or payment of any of the items of income specified in subsection (b) (to the extent that any of such items constitutes gross income from sources within the United States), of any nonresident alien individual or of any foreign partnership shall (except as otherwise provided in regulations prescribed by the Secretary under section 874) deduct and withhold from such items a tax equal to 30 percent thereof, except that in the case of any item of income specified in the second sentence of subsection (b), the tax shall be equal to 14 percent of such item.

You need a CPA.

[GirlinContempt]

6. Er, what is the second sentence of subsection B?

[MrCoffee]

7. lol, it goes much deeper than (b)

i was a tax attorney in a past life. you need a CPA to structure your US earnings in order to 1)reserve what you legitimately owe up front, and 2) deduct what you can legitimately deduct.

you don't need a tax attorney until the audit hits.

[GirlinContempt]

8. Yay someone who knows!

Thanks MrCoffee

So the vast majority of our earnings are not from US sources, does that make a difference at all? We've been doing business with U.S. NFPs for years and have never had anything like this come up :(

[MrCoffee]

9. i'm confused...your customer is withholding 30%?

ok, maybe you do need a tax attorney. tell the university you're claiming a 1441(c)(1) exemption, then call a lawyer.

[GirlinContempt]

10. Yes, they're saying THEY have to withhold the 30%

I'm waiting to have the info forwarded to me. It's all at work and I'm off work. But it seems sort of nutty.

[GirlinContempt]

13. So, this is how it is boiling down, or so it seems:

This is part of the communication we received from our customer:

"Passive income, such as royalties, licensing fees, and rents are sourced according to where the royalty or license is exercised, or where the rental property is used. If the royalty or license is exercised inside the U.S., or the property being rented is used inside the U.S., the payments for these fees are deemed "U.S. source income", and are taxable at the 30% statutory rate applied to international individuals and entities."

It seems to me, a layman, that our rentals are not passive. The goods we are renting are not passive in any definition I am familiar with. We rent complete shows to this customer, and when we get an order, we often have to build new items to rent to them, alter existing items, pay our staff, etc. Then we have to maintain the goods after the fact. My understanding of passive income is that it comes from either a non material source, or it not from an active participation in business.

We have no US presence, and are not a US taxpayer.

I'm sorry if I'm asking too much, we are going through some other channels, but I'd really like as much info or advice as I can get just to even understand it. If you don't have the time or the inclination I fully understand :)

[Bake]

11. And a tax lawyer

For sure.

Bake

[GirlinContempt]

15. Why does this tax stuff have to be so confusing?

:\

[jakefrep]

12. Sounds like "backup withholding"

US companies are required to withhold 30% tax on any individual or partnership that does not provide a US tax ID number.

[GirlinContempt]

14. But we aren't a US entity....

[tigereye]

16. what does your Canadian accountant say?

he or she must be familiar with this provision, since I would suspect that a lot of Canadian companies who do a variety of business in the US are subject to this provision...


I finally had to hire an accountant for my small business and he has saved me quite a bit in taxes....

[GirlinContempt]

17. We used to have an accountant, now we don't.

We are defiantly trying to get in touch with people who know the laws and things. That's just madly frustrating too :D

[GirlinContempt]

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[GirlinContempt]

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