BC 2024 Budget: Provincial sales tax (“PST”) changes

BC announced several proposed tax measures in its 2024 budget (released on February 22, 2024). Included in the long list of proposed changes – the more notable of which were summarized in our recent Tax Alert – are several significant amendments to the BC Provincial Sales Tax Act (“PSTA”). This blog discusses two of those measures:

• Amendments to the PSTA’s software rules with the effect of making many more digital services taxable.
• Amendments to the appeals process, which may potentially lengthen the time it takes to appeal an assessment.

Software

The application of BC’s PST to electronically delivered products has been controversial for many years and is likely to become even more so as a result of the proposed retroactive changes to the definition of software in the PSTA. Although the government had announced that it would be making retroactive changes to “support how the PST was administered prior to the court decision” in Hootsuite Inc. v British Columbia (Finance), 2023 BCSC 358 (“Hootsuite”), the changes, which are retroactive to April 1, 2013, expand the number of taxable products far beyond the province’s published interpretations.

We note that the draft legislation includes the right for the government to address transitional issues by regulation until March 31, 2025. In other words, we do not have certainty on the application of PST to software until the regulations are released, which could be as far out as the end of next March.

The proposals would expand the definition of software to include:

• Infrastructure as a Service (IaaS) which is defined to include access or the right to access computational services, including computing or processing capacity and electronic storage;
• Software as a Service (SaaS) that is delivered or accessed by any means;
• an application programming interface (“API”); and
• coded instructions or the right to use coded instruction designed to cause an electronic device to perform a task.

The inclusion of APIs is noteworthy as BC agreed in Hootsuite that APIs did not constitute software. Yet, under the proposals, APIs would be deemed to be software retroactive to 2013.

Software is subject to BC PST if it is acquired for use on an electronic device ordinarily situated in BC. In this regard, the definition of use of software has also been expanded to include accessing software directly or indirectly – including on, through or with other software or electronic devices. This may make it very difficult for a purchaser to know when they are purchasing software (as defined) or a product that includes software.

While these changes mean that virtually all businesses will pay more PST on their IT-related purchases, the changes are likely to most directly affect technology companies operating in British Columbia. For example, a social media company will owe tax on more of its inputs, including cloud computing and other digital services, and will also need to charge tax to its customers on its products (see Example 3 under “Infrastructure as a Service” in BC’s Bulletin PST 105 (Revised: February 2024)). This cascading of tax arguably makes BC a less competitive jurisdiction in which to operate as compared to other jurisdictions such as Ontario and Alberta.

Although the changes are retroactive to April 1, 2013, the PSTA typically limits assessments to four years. Accordingly, businesses should review their IT-related purchases in the past four years to determine if they need to self-assess more BC PST.

Changes to appeal process

Under the current PSTA, an assessment is issued by the director designated by the Minister of Finance (the “Director”). That assessment can then be appealed to the Minister of Finance (the “Minister”). A taxpayer may subsequently appeal the Minister’s decision to a court.

Under the proposed changes, the Minister can affirm, amend, or change the decision, amount imposed or nature of the assessment or require the Director to reconsider the assessment. After a reconsideration, if the Director does not change the assessment, she must issue a “notice of reconsideration” to the taxpayer who can then appeal the reconsideration to the Minister. Notably, there is no mechanism to appeal the reconsideration directly to court. Instead, the taxpayer must appeal the reconsideration to the Minister again. Thus, the new appeal process can become fairly circular.

In addition, under the proposed legislation, there is no provision governing the timeline for the Director’s or Minister’s consideration or reconsideration of an appealed assessment. Under the current appeal process, it typically takes a minimum of 12-18 months before the Minister’s decision is issued, with some appeals taking 2-3 years or longer. The reconsideration process may lengthen the appeal timeline even more.

Decisions of the Minister, and the underlying assessments are frequently overturned by the courts. However, it is only after the Minister’s decision is issued that the taxpayer has an opportunity to appeal the matter to court. The court appeal process typically takes 1-2 years or more. The implications of these changes are that it could take well over 5 years for the final resolution of an appeal in the BC Courts.

That timeline is exacerbated by the fact that assessments are due and payable upon issuance. Taxpayers may thus face significant financial hardship while the appeal process unfolds over an even lengthier period of time.