Retroactive legislation to reverse recent court decision on BC provincial sales tax and cloud computing
On June 20, 2023, the Province of British Columbia (the “Province”) released a Provincial Sales Tax (PST) Notice to providers and purchasers of cloud software and services (the “Notice”). The Notice came in response to the B.C. Supreme Court decision in Hootsuite Inc. v. British Columbia (Finance), 2023 BCSC 358 . Our prior blog analyzes the decision.
The Notice stated that the Province intends to introduce legislation to reverse the decision, with retroactive effect. The legislation would aim to apply PST to purchases of cloud computing services (such as Amazon Web Services or Microsoft Azure) and other digital products, as the Province believes it should have applied prior to the Hootsuite decision. It is currently unknown how far back the legislation’s retroactive effect will go, and we expect more details in Budget 2024 when the legislation is slated to be released.
According to the Notice, cloud computing services were always intended to refer to the right to access taxable software programs, a taxable telecommunication service, or both. Additionally, while support services (such as customer or tech support) are not taxable, the Province’s position is that support services that include a non-incidental right to use software or telecommunication services were intended to be taxable in whole or in part, notwithstanding the Court’s findings to the contrary in Hootsuite.
At this stage, it is unknown what exactly the proposed legislation will entail. While the Notice refers to the use of retroactive legislation as enhancing the certainty for service providers and their customers, we note:
- The Province’s current bulletins referred to in the Notice do not speak to cloud computing services.
- The Province’s Tax Interpretation Manual – General Rulings 13/R.1 arguably conflicts with the Notice as to how digital product sellers determine the application of PST.
- The Court provided multiple strong reasons as to why cloud computing services were not subject to PST.
Unfortunately, the use of retroactive legislation to expand the application of PST to software and telecommunication services used by businesses such as Hootsuite may have far-reaching consequences. For example, businesses may consider moving their operations to provinces that either do not have a provincial sales tax (such as Alberta) or provinces where the GST/HST imposed is refundable (such as Ontario).