Q. (cont.) We are trying to determine if we should have them fill out some type of W-8 form. I know that when paying for services, income source is determined by where the services are performed, but how does this apply to online services? The services are effectively used in the U.S., but performed by someone sitting at a computer in Canada working for a Canadian company.
A. I was able to get through to the IRS Foreign Reporting line today, and spoke to Mr. Stern (IRS information ID# 1000199318). We don't have enough information to definitively answer the question, but here's what he said:
You should collect a W-8BEN-E form from the Canadian company. You are correct insofar as income source is determined by where the services are performed. In this case, the services are being provided by a Canadian entity, but here's the gray area: Are the logistics services confined to Canada, or are the logistics services crossing the border into the U.S.? If not, you should be fine without reporting, as this is foreign-sourced income. (See Publications 515 and 519: https://www.irs.gov/pub/irs-pdf/p515.pdf and https://www.irs.gov/pub/irs-pdf/p519.pdf.) If they are, however, you may need to concern yourself with the treaty claimed on the W-8 form and withhold or not based on that information.
If, in fact, the logistics services as provided are crossing borders, you may need to contact a tax consultant.