The application of British Columbia’s provincial sales tax (“BC PST”) to digital services is controversial. A main issue has been whether the services should be taxed as “software”. The British Columbia Supreme Court in Hootsuite Inc. v British Columbia (Finance), 2023 BCSC 358 (“Hootsuite”) has provided helpful guidance in determining what constitutes “software”.
The Court determined that the cloud computing services at issue were not taxable. The government did not appeal the decision, but has also not updated its administrative position on this issue to date.
By way of overview, Hootsuite Inc., which is a social media management company in British Columbia, purchased various cloud services from Amazon Web Services Inc. (“AWS”). The Ministry of Finance assessed Hootsuite for failure to remit BC PST on the services.
Given the complexity of the products at issue, the Court relied on evidence provided by expert witnesses to determine the application of BC PST to the services. In doing so, it noted that “[s]ome cloud computing products may be taxable, some may not.” The Court also provided useful guidance on the application of BC PST to digital products, and its findings have implications far beyond the cloud computing sector.
More specifically, the Court found the following:
- A taxable software program requires that a user in BC must be able to interact directly with the software and create an output based in part on those interactions with the program. Thus, whether a specific software program is taxable can depend upon the purchaser or user.
- The tax characterization of a product or service depends upon its “fundamental nature.” While the cloud computing services at issue included some element of software, their “fundamental nature” was on-demand computer infrastructure services. This methodology of analysis can extend far beyond cloud computing. For instance, the provision of consultation services through digital mediums likewise should not constitute a sale of software.
Notably, the parties agreed that the application programming interfaces provided by AWS were not software.
Purchasers of the same or similar services may want to apply to the government for refunds of BC PST paid in the past four years. Unfortunately, vendors have limited ability to refund tax paid by purchasers.
Vendors who are collecting BC PST on their digital products may want to seek a ruling on their own products based on the findings in Hootsuite. However, as the Ministry of Finance is well known for using ruling requests as audit leads, we caution against seeking administrative rulings unless BC PST is already being collected.