Are cloud computing services subject to provincial sales tax? According to a recent decision of the BC Supreme Court in Hootsuite Inc. v British Columbia (Finance), 2023 BCSC 358 the cloud computing services AWS Support, EC2 and S3, and AWS direct connect are not subject to provincial sales tax under the Provincial Sales Tax Act, S.B.C. 2012, c. 35 [PSTA]. In short, these services are not taxable as, depending on the service, they are not the purchase of software programs, they constitute the purchase of on-demand infrastructure (IaaS), the service does not contain a software program, the software program is not used in BC, the service is not used in BC, or the service is otherwise exempt under incidental exemptions in the PSTA.
The PSTA provisions
The applicable provisions related to the purchase of software under the PSTA were summarized by the court as follows:
Subsection 15 of the PSTA states the entire consideration of a purchase containing software constitutes the purchase price of the software.
Section 1 of the PSTA defines “purchaser” in respect of software, “electronic device” and “software” as follows:
“electronic device” means a device by which a person may
(a) send, receive, download, view or access a telecommunication, or
(b) use software;
“purchaser” means the following…
(b) in relation to software, a person who agrees to pay or is otherwise obliged to pay consideration for software
(i) provided to the person for the person’s own use or benefit, …
“software” means the following:
(a) a software program that is delivered or accessed by any means;
(b) the right, whether exercised or not, to use a software program that is delivered or accessed by any means;
(c) a contractual right
(i) to receive modifications to our new versions of software programs described in paragraph (a) or (b) if modifications or new versions become available, whether or not that right is exercised…
The court noted that the term “software program” is not defined in the PSTA. However, relying on expert evidence, the court interpreted the term as analogous to “Application software” which it defined as “typically referred to as software programs, or software that are built to address a specific problem for an application defined by the user. It directs the computer to execute a set of instructions that processes data for the user. For example, word processors and database management tools or software programs.”
The court also found that these “are applications in which a user can interact directly with and create an output based in part on those interactions, and software that is opaque, in the sense that the user cannot interact with the software and create an output. This distinction is user-based, as some users may be able to interact with software while others may not.”
Division 5 of part 5 of the PST also imposes PST on telecommunication services. This part of the PSTA was summarized by the court as follows:
Subsection 130(1) of the PSTA a provides as follows:
130(1) A purchaser of a telecommunication service must pay to the government tax on the provision of the telecommunication service at the rate of 7% of the purchase price of that telecommunication service.
Section 1 of the PSTA defines “telecommunication service”:
“telecommunication service” means any of the following:
(a) the right whether exercised or not, to utilize a telecommunication system to send or receive a telecommunication by means of an electronic device that is ordinarily situated in British Columbia;
(b) the utilization of a telecommunication system to send or receive a telecommunication by means of an electronic device that is ordinarily situated in British Columbia;
(c) a dedicated telecommunication service;
(d) the right, whether exercised or not, to download, view or access, by utilizing a telecommunication system, one or more of the following telecommunications by means of an electronic device that is ordinarily situated in British Columbia:
(i) an audiobook;
(ii) an audio program;
(iii) music;
(iv) a ring tone;
(v) a television program, motion picture or other video.
Section 1 of the PSTA also defines “sale” in a manner in which the provision of telecommunication services are excluded for taxation purposes if they are incidental to a contract for the purchase of non-taxable services:
“sale” does not include the following:
(k) the provision of tangible personal property, software or a telecommunication service that, in prescribed circumstances, is merely incidental to a contract for the provision of services that are not subject to tax under this Act.
Subsection 7(2) of the Provincial Sales Tax Regulation, B.C. Reg 96/2013 defines the circumstances in which the inclusion of telecommunication services will be considered “merely incidental” to a contract for non-taxable services:
7(2)…the provision of tangible personal property, software or a telecommunication service is merely incidental to a contract for the provision of services that are not subject to tax under the Act in the following circumstances…
(i) the fundamental and overriding objective of the contract is the acquisition of the service and not the acquisition of the tangible personal property, software or telecommunication service,
(ii) there is no separate purchase price for the tangible personal property, software or telecommunication services, and
(iii) the total consideration payable for the service including the tangible personal property, software or telecommunication services provided, is the same as, or only marginally different from what would be the total consideration payable for the service if the tangible personal property, software or telecommunication service were not provided…
Court findings
Question for the Court: Is AWS support a “software program” or “telecommunication services” subject to PST because the online chat feature is accessible through Hootsuite’s computers, which are located in British Columbia and accessed through a telecommunication network?
Answer: These AWS services are not taxable under the PSTA for the following reasons:
a) the fundamental nature of the purchase was for technical expertise;
b) these services do not contain a “software program”;
c) the service is not used in British Columbia;
d) the service is exempt under the incidental exemption clause; and
e) the service does contain telecommunication services, but is exempt under the incidental exemption clause.
Question for the court: Is infrastructure as a service (IaaS) cloud computing a “software program” for use on or with an electronic device ordinarily situated in British Columbia?
The services in issue comprised mainly EC2 and S3. Both EC2 and S3 fall within the category of IaaS. According to the court, EC2 provides computing capacity that can scale with the objective of eliminating the need for users to invest in hardware upfront. EC2 creates a virtual machine which provides computing resources to Hootsuite. S3 provides a virtual machine with a different type of computing capacity than the EC2 product. S3 is a hardware storage product in which users install an application program to store and backup data on the virtual machine.
Answer: EC2 and S3 are not taxable under the PSTA for the following reasons:
a) the fundamental nature of the purchase was for an on-demand computer infrastructure service;
b) the services do not contain a “software program” with the exception of the Linux operating system;
c) the software program is not “used” in British Columbia; and
d) the service is exempt under the incidental exemption clause.
Question for the court: is AWS direct connect a “software program” or “telecommunication services” subject to PST because it is a dedicated telecommunication network which links different location within the United States with a high-speed network to maximize the efficiency at which AWS services can be provided?
Answer: AWS direct connect, and the associated AWS data transfer charges, are not taxable under the PSTA because the transmissions are not sent to or received in British Columbia.
Concluding remarks
While the above decision found that certain services were not subject to PST, the decision left open whether other services such as software as a service (SaaS) might be taxable. Further, some of the findings were premised on the AWS services being delivered from devices outside of BC. Many cloud services from the major providers such as Microsoft, Google, and AWS are now also delivered from infrastructure located in Canada. Therefore, some aspects of the decision may have been different if the services in issue were delivered from Canadian locations. As well, the decision only deals with the BC provincial sales tax. It did not address PST, GST, or HST taxes payable across the country.
As cloud computing is growing at an exponential rate in Canada, this decision is an important one for businesses structuring cloud computing deals. As the very least, it highlights the importance of allocating fees to specific services and considering whether the services should be hosted in Canada (something that is desirable from a privacy perspective).
