What Defines a U.S. Sourced Grain Sale Might Surprise You

This is part two of a five-part series that originally ran in the Western Producer on October 8th, 2015.

It’s important to understand the nuances of selling grain into the U.S. to come out ahead of the tax man – on both sides of the border.

Although shipping grain across the border may seem straightforward, there are many variations on what constitutes a U.S.-sourced sale - which can be taxed by the IRS - and that’s where you can inadvertently fall afoul of the rules.

One common misconception is if you get paid in Canadian dollars, you won’t get hit by a U.S. tax levy. This is incorrect. If the grain is deemed to have been a U.S.-sourced sale, you can be subject to U.S. federal taxation.

Therefore, the first step is be clear on what constitutes a U.S.-sourced sale. You can have a U.S.-sourced sale either by the shipping terms of the product or from the solicitation to make the sale.

A solicitation activity could be as simple as crossing the border, getting a handful of your Canadian grain graded and making the initial sales pitch. The grain you sell on the basis of that initial, seemingly innocent transaction can be counted as U.S. sourced, even if you return home, strike a deal with an agent in Canada and are paid in Canadian dollars.

Common Shipping Terms

• Risk of loss passes in the U.S.: The grain faces possible downgrade once in U.S.
• Title passes in the U.S.: The grain ceases to be yours and becomes the buyer’s in the U.S.
• Economic transfer passes in the U.S.: The balance of payment or final payment occurs when the grain enters the U.S.

Determining what constitutes a U.S.-sourced transaction is not straightforward but is essential to meet “grey” U.S. tax rules without being penalized when selling inventory you have produced yourself.

Key to enabling a successful transaction is having a clear, defined contract. Here are several considerations and examples:

Where your grain gets signed over to a buyer – in the U.S. or in Canada - is important because the IRS states where the seller's rights, title, and interest in the product pass over to the buyer is significant.

However, the location where you sign the contract has no bearing on the title at all. You can sign a contract in a Canadian-based office, but if the title to the grain is passed to the buyer in the U.S., it is considered U.S.-sourced and therefore taxable under the IRS.

The good news is the IRS will abide by what is specified in a contract re passing title, or ownership, of the grain. In other words, if you have a contract clearly stating when and where the sale is to be considered completed, the IRS will accept it. But you need a well-documented contract as evidence of intentions and follow through with the contract terms.

If you do not have a clear contract, you could face complex legal and regulatory scrutiny. This scrutiny includes determining the parties' intent concerning where title passes, resorting to local commercial law and analysis of the parties' conduct, the underlying documents, common usage of the trade in the goods in which the parties are dealing and all the other surrounding facts and circumstances.