B.C. Supreme Court Justice Michael Thomas ruled that Hootsuite Inc., which operates an online social management system, will not have to pay provincial sales tax (PST) on services purchased from Amazon Web Services Inc. (AWS). In March 2017, the provincial Ministry of Finance told the company an assessment would be issued in respect of a failure to self-assess PST on its purchase of the Amazon Elastic Compute (EC2) Cloud, Amazon simple storage (S3) service, AWS direct connect and AWS support.
The Provincial Sales Tax Act (PSTA) sets out the rules in respect of the imposition of PST on software programs, saying that a “a purchaser in British Columbia who purchases software for use on or with an electronic device ordinarily situated in British Columbia must pay to the government tax at the rate of seven per cent of the purchase price of the software.” But the term “software program” is not defined in the PTSA, but the Act’s predecessor, the Social Service Tax Act (SSTA), defines “software program” as “software that is a packaged or prewritten software.”
The Ministry argued the court should rely upon the definition of software program contained in the SSTA, saying the legislature chose to remove reference to the definition of software program to account for the fact that computing in the modern world is a rapidly evolving concept. But Justice Thomas ruled, because the “range and scope of software has expanded so dramatically into so many products and services over the years,” the legislature had drawn a distinction between software and software programs when it revised the law to ensure consistency on how products and services are treated for taxation purposes.
“Implicit in this finding is the conclusion that, under the PSTA, all ‘software programs’ are ‘software’ but not all ‘software’ constitute ‘software programs.’ Under the SSTA, this was not the case,” he wrote. “In my view, the key distinction between ‘software’ and a ‘software program’ for the purposes of the PSTA is that a ‘software program’ requires the purchaser to utilize the software as an ‘application’; that is, the user must be able to interact with the software and create an output based in part on those interactions with the program. In my view, this is in accord with the common usage of the term ‘software program’ as distinct from ‘software.’”
Justice Thomas created a distinction between different types of software — applications a user can interact with directly and create an output, and software that is “opaque” where the user does not have direct access. He ruled the AWS support service fell into the latter category because Hootsuite cannot interact directly with the AWS management console or create an output, as the “console is simply a portal through which Hootsuite can communicate with AWS engineers.”
“The Ministry says that the fact that Hootsuite uses a computer located in British Columbia to interact with the technical support staff through the console located outside of British Columbia is sufficient to trigger PST as a purchase of software under the PSTA,” he wrote. “In my view, the web interface is an opaque application as the user cannot access or modify the console; the only purpose of the interface is to facilitate the exchange of technical information from the engineers to Hootsuite. As such, the console does not constitute a software program taxable to Hootsuite under the PSTA.”
The cloud computing services were similarly opaque and thus not subject to sales tax, Justice Thomas wrote. He further ruled that the AWS direct connect service and its associated transfer charges, were also not taxable under the PSTA because the transmissions are not sent to or received in British Columbia (Hootsuite Inc. v British Columbia (Finance), 2023 BCSC 358, released March 10).
Gavin Cameron, Fasken
“The court got it right and looked at the legislative history and found the legislature created a nuanced definition in the statute which wasn’t meant to capture everything under the sun — for example, groceries being purchased online,” he said. “When you buy groceries through something like Uber Eats you are interacting with software — so do your groceries all of a sudden become taxable just because you purchased them through an app rather than going to the store yourself?”
Cameron said the court did exactly what the legislature intended.
“And that is when you are buying a software application that you use for something like word processing, that is taxed,” he said. “But when you are purchasing some other service that is simply a service provider — because we are in the year 2023 and pretty much everything has some software involved in it to provide the core service — you apply a common-sense approach and look at what the individual is actually buying.”
But Geoffrey Loomer, an associate professor at the University of Victoria who specializes in tax law and policy, said the judge took “quite a narrow view” in defining “software program” and “telecommunications services.”
“I expect that B.C. will appeal,” he said. “The case is another example of how difficult it is to apply 20th-century, geographically-based sales taxes to 21st-century digital services.”
A spokesperson for the Ministry of Finance said the province was unable to provide a comment because it is reviewing the decision.
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