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Taxing Software: What the B.C. Provincial Sales Tax Means

22/03/2019


When you think of software, you might envision buying a program to enhance your computer’s capabilities. In reality, software is everywhere – on our phones, at our businesses and in our homes. And as such, it is taxed.

Software developers and sellers supply a service, which in Canada, is subject to federal taxes through GST / HST and QST. On a provincial level, Manitoba, Saskatchewan and B.C. all have slightly different rules around what is considered software and how to tax it. This blog will focus on B.C.

Hard to Define

Often the most challenging part of determining how software is taxed is identifying where and what the actual supply is. Software can be something tangible, something you can physically touch, like that boxed software you buy off-the-shelf.

But software often is intangible. You click on a button on your computer and voila, you have downloaded some software to your laptop or phone.

When B.C. brought in the new PST rules in 2013, it took the opportunity to expand its definition of what is considered software.

"…software means the following:
  1. A software program that is delivered or accessed by any means;
  2. The right, whether exercised or not, to use a software program that is delivered or accessed by any means; "

This definition still includes the supply of software as a physical tangible item (this has always been taxable) but it now includes software delivered by any means. This would include software being installed on your phone when you download an app, as well as software accessed through the cloud.

Location-Based Tax for Sellers and Users

The “fun” part of provincial sales tax is that not only are registered B.C. vendors required to collect the tax, users who bought from out-of-province suppliers (and haven’t been charged the tax) must self assess. In this way B.C. has tried to put software providers in and out of B.C. on an equal footing. Tax would be almost guaranteed to be remitted.

So, regardless of where the software is sourced, the PST must be paid when used in B.C. Where a business is registered for PST, they can include this PST on their next return. Where someone is not registered for B.C. PST, they can file a casual remitter form (FIN 405).

When software is bought for use in multiple jurisdictions, businesses can prorate the amount of PST applicable, based on the number of users in B.C. There may be PST owing in other PST provinces, but B.C. is only targeting the use and consumption within the province.

Taxing Telecommunications

Software and telecommunication services are both taxable, and each of these categories have very specific exemptions from the tax. Telecommunication services acquired in B.C. are subject to PST at the rate of 7 percent. As defined in PST-107:

"The right, whether exercised or not to utilize a telecommunications system to send or receive one or more telecommunications by means of an electronic device ordinarily situated in B.C.…. "

As with everything related to PST, in B.C. the specific details of what you are doing or receiving are critical to determine whether you are acquiring a telecommunication service. This becomes evident when acquiring something from a web site. For example, still images or text are not considered a telecommunication service. But if you acquire something like an audio book, that will be taxable as a telecommunication service.

Exemptions and Determinations

There are exemptions available for re-sale software and telecommunications items, depending on where you acquire them. As well, there are various exemptions available in the education sector, fishing sector and where something relates to or becomes part of production machinery and equipment.

Lastly, I wanted to mention that when you are providing software or a telecommunication service with something else that may not be considered taxable for PST purposes (such as consulting or web design), it is important to determine if the software or telecommunication portion of what is being provided is incidental to the supply or if it is significant enough to make the entire supply taxable.

The Provincial Sales Tax Act legislation provides specific rules to determine whether something is considered incidental. In each case you need to look at the overriding purpose for the contract or supply and the value of the taxable items that are included in the exempt supply. One way to avoid being caught off guard with these rules is to separate out the supplies before hand. Where you have a separate contract for the web design, and then a contract for the provision of the software, it is clear what will attract tax.

As so much of this industry is conducted through clicks and other interactive means on our mobile devices and often does not involve standard invoicing, it is important to understand where and when the tax liabilities lie.

For further information, contact Heather Weber, Indirect Tax Services Leader, at 250.763.8919 or [email protected] or Angela Chang, CPA, CGA, CAFM, at 604.685.8408 or [email protected].