Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
XXXXX
XXXXX
XXXXX
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 83185
Business Number: XXXXX
Attention: XXXXX
July 2, 2010
Dear XXXXX:
Subject:
GST/HST RULING
Tax status of music cards
Thank you for your XXXXX of XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the sale of various music cards.
HST currently applies at the rate of 13% in Nova Scotia, New Brunswick, and Newfoundland and Labrador. Effective July 1, 2010, HST will apply at the rate of 15% in Nova Scotia, 13% in New Brunswick, Newfoundland and Labrador, and Ontario, and 12% in British Columbia. GST will continue to apply at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
We understand from your XXXXX and information from specific websites and contacts, the following facts:
1. XXXXX (the "retailer") sells to its customers music cards in various denominations (e.g. $10, $20) or for a specified number of, or period for, music downloads from the Internet (e.g. download 12 songs or unlimited downloading for a 3-month subscription). After purchasing a music card from the retailer the customer, subsequent to using the card, can download music from the specified website as per the information found on the music card. The characteristics of each card are provided below.
2. The music cards are sold to the retailer by XXXXX (the "vendor"). The vendor, a registrant, has not charged GST/HST for any music cards sold to the retailer.
3. The music cards sold by the retailer include the XXXXX (Unless specified, "Card" means any one of these cards and "Cards" means all the cards collectively.)
4. The Cards are plastic cards and on the back of the Cards is a serial number, a hidden PIN or activation code on the Cards or packaging and a bar code. The Cards either refer the bearer to the specified website for the full Terms and Conditions or make no reference to any terms and conditions: but in all cases the Cards refer the bearer to a specific website. In addition, certain websites provide a Card in an electronic format.
5. When supplied to a customer a Card is activated by the retailer swiping the Card through its point-of-sale terminal. The information is transmitted to the vendor for validation and authorization. Once approved, the Card is ready for use online as stated on the back of the Card.
6. The vendor tracks the inventories of the Cards and funds payable to the vendor from the various retailer locations. The vendor then sends a request to the retailer's financial institution, as pre-authorized by the retailer, to transfer the funds due to the vendor. The vendor also performs reconciliation with the retailer and the specified website owners for the Cards. The Card is now ready for use and the retailer's role has ended.
7. The Card may be transferred to another person by the customer. In this ruling, the person who uses the Card and downloads the music on the specified website is referred to as the "recipient".
XXXXX Card:
8. Subsequent to a customer purchasing XXXXX Card, the recipient is eligible for the same monetary value online for music downloads from the XXXXX website, XXXXX.
9. After the recipient enters the PIN or activation code, the value of the XXXXX Card is transferred to an online XXXXX account with the same monetary value as the stated value on the XXXXX Card; the Card itself cannot be used again for any future use. Each download exercised by the account holder (i.e. the recipient) reduces the balance in the online account. Any remaining value is held in the XXXXX account in favour of the recipient. Music downloads are available until the value of the account has been depleted by music downloads requiring payment.
10. The tax-included costs for each music download are deducted from the value in the XXXXX account until depleted.
11. The online XXXXX account, if not depleted, expires after XXXXX after the later of the date of issuance or last activity, regardless of any remaining value in the account.
12. According to the terms of agreement or privacy policies of the XXXXX website, the prices quoted clearly include the price of the music download including any taxes.
13. The Terms and Conditions are not on the XXXXX Card but on the website read, in part, XXXXX.
14. The terms of agreement or privacy policies state that the agreement is governed and construed in accordance with the laws of Canada and the Province of XXXXX.
XXXXX Card:
15. Similar to the XXXXX Card, after a customer purchases a XXXXX Card, the recipient is eligible for the same monetary value online for music downloads from the XXXXX website, XXXXX.
16. After the recipient enters the PIN or activation code, the value of the XXXXX Card is transferred to an online XXXXX account with the same monetary value as the stated value on the XXXXX Card; the Card itself cannot be used again for any future use. Each download exercised by the account holder (i.e. the recipient) reduces the balance in the online account. After downloading music, any remaining value is held in the XXXXX account in favour of the recipient. Music downloads are available until the value has been depleted by music downloads requiring payment.
17. The tax-included costs for each music download are deducted from the value in the XXXXX account until depleted.
18. The XXXXX account, if not depleted, expires after XXXXX of purchase of the XXXXX Card, regardless of any remaining value in the account.
19. According to the terms of agreement or privacy policies of the XXXXX website, the prices quoted clearly include the price of the music download including any taxes.
20. The Terms and Conditions are not on the XXXXX Card but, the bearer is required to open a XXXXX account and, from the website, read, in part, XXXXX.
21. The terms of agreement or privacy policies state that the agreement is governed and construed in accordance with the laws of Canada and the Province of XXXXX.
XXXXX Card:
22. After a customer purchases a XXXXX Card the recipient is XXXXX from XXXXX. In addition to a stated price, the length of time is stated on the front of the XXXXX Card.
23. After the recipient enters the PIN or activation code from the XXXXX Card, the XXXXX Card is redundant, cannot be used again for any future use and the recipient XXXXX website as stated on the XXXXX Card. After downloading music additional music downloading is still permitted by the recipient until the XXXXX.
24. The online XXXXX account will become invalid once the time XXXXX expires, regardless of the number or frequency of music downloads.
25. XXXXX has granted to the vendor the right to promote, market and supply XXXXX Cards and certain rights associated with the XXXXX Cards. The vendor, a registrant, is the first person to make any supply in Canada with respect to the XXXXX Cards.
26. The Terms and Conditions are not on the XXXXX Card but the bearer is required to open a XXXXX account where the following terms are stated:
• XXXXX.
• XXXXX.
27. The terms of agreement of the XXXXX website concerning taxes state, XXXXX The retailer has advised that XXXXX does not charge or collect any taxes, including GST/HST, when the XXXXX Cards are used-this fact was confirmed by XXXXX. Furthermore, XXXXX advises the retailer that it must collect such applicable taxes, including GST/HST, at the time of sale of the XXXXX Cards.
28. The terms of agreement or privacy policies of the XXXXX website state that the agreement is governed by laws outside Canada; specifically they are governed by the laws of XXXXX.
XXXXX Card:
29. After a customer purchases a XXXXX Card the recipient is eligible for the number of music downloads indicated on the XXXXX Card from the XXXXX website, XXXXX.
30. After the recipient enters the PIN or activation code from the XXXXX Card, the XXXXX Card is redundant, cannot be used again for any future use and the recipient now has online access to the limited number of downloads as stated on the XXXXX Card.
31. The online XXXXX access expires after the earlier of the maximum number of downloads XXXXX has occurred or XXXXX after validation of the XXXXX Card.
32. XXXXX has granted to the vendor the right to promote, market and supply XXXXX Cards and certain rights associated with the XXXXX Cards. The vendor, a registrant, is the first person to make any supply in Canada with respect to the XXXXX Cards.
33. The Terms and Conditions are not on the XXXXX-Card but, the bearer is required to open a XXXXX account where the following terms are stated:
• XXXXX.
• XXXXX.
34. According to the terms of agreement of the XXXXX website concerning taxes, XXXXX The retailer has advised that XXXXX does not charge or collect any taxes, including GST/HST, when the XXXXX Cards are used-this fact was confirmed by XXXXX. Furthermore, XXXXX advises the retailer that it must collect such applicable taxes, including GST/HST, at the time of sale of the XXXXX Cards.
35. The terms of agreement or privacy policies of the XXXXX website state that the agreement is governed by laws outside Canada; specifically they are governed by the laws of the XXXXX.
Ruling Requested
You would like to know the tax status of a supply of:
1. an XXXXX Music Card (sometimes called the XXXXX Gift Card; referred to as the "XXXXX Card");
2. a XXXXX Music Card (referred to as the "XXXXX Card");
3. a XXXXX Music Subscription Gift Card (referred to as the "XXXXX Card"); and
4. a XXXXX Music Download Card (referred to as the "XXXXX Card").
Ruling Given
This ruling applies only to the physical form of the Cards sold by the retailer. Based on the facts set out above, we rule that the supply of:
1. an XXXXX Music Card (sometimes called the XXXXX Gift Card; referred to as the "XXXXX Card") as described above is a gift certificate for GST/HST purposes subject to section 181.2 and, accordingly, is not subject to GST/HST at the time of sale;
2. a XXXXX Music Card (referred to as the "XXXXX Card") as described above is a gift certificate for GST/HST purposes subject to section 181.2 and, accordingly, is not subject to GST/HST at the time of sale;
3. a XXXXX Gift Card (referred to as the "XXXXX Card") as described above is a gift certificate for GST/HST purposes subject to section 181.2 and, accordingly, is not subject to GST/HST at the time of sale; and
4. a XXXXX Card (referred to as the "XXXXX Card") as described above is a gift certificate for GST/HST purposes subject to section 181.2 and, accordingly, is not subject to GST/HST at the time of sale.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
For purposes of section 181.2, gift certificates may include plastic gift cards that can be read electronically that are issued by a vendor. To be a gift certificate, the gift card must entitle the bearer to a particular supply of goods or services or to a reduction of the total amount of money payable (i.e. consideration plus applicable taxes including GST/HST) for any supply of goods or services supplied by the issuing vendor. Furthermore, a gift card must have the characteristics of a gift certificate as described in GST/HST Policy Statement P-202, Gift Certificates, to be considered a gift certificate within section 181.2; in other words, for a gift card to be considered a gift certificate, the gift card:
a) must have a value or be for a particular supply of property or services;
b) be redeemable for the purchase of property or services;
c) consideration must have been given; and
d) have no intrinsic value.
In the situation presented, the retailer has acquired the Cards for supply from the vendor. The retailer sells the Cards for the amount printed on the Cards to its customers. The Cards may be kept by the customer or transferred to another person before accessing the specific website referred to on the Cards.
Music cards, in many cases, have similar characteristics as gift certificates that fall within the provision of section 181.2. The XXXXX Cards, the XXXXX Cards, the XXXXX Cards, and the XXXXX Cards are gift cards that are gift certificates within section 181.2.
XXXXX Cards and XXXXX Cards have a stated value. Through the appropriate website, the values of the XXXXX Cards and XXXXX Cards are transferred to online accounts with the same values as the stated values. XXXXX Cards and XXXXX Cards once processed and activated by the vendor through the retailer and after the recipient enters the PIN or activation code are redundant and the recipients then access their online accounts. The recipients' accounts are subsequently used for the purchase of property, in this case, music. Therefore, XXXXX Cards and XXXXX Cards are gift certificates for GST/HST purposes subject to section 181.2 as XXXXX Cards and XXXXX Cards have value, are redeemed for the purchase of property or services, consideration has been paid, and they have no intrinsic value.
In the case of XXXXX Cards and XXXXX Cards, the terms of agreement state that any applicable taxes and provincial sales taxes are included in the total price charged to a recipient at the time of downloading music. When downloading music, the value of the recipient's account is reduced by the consideration and taxes. Therefore, GST/HST is charged to the recipient's account at the time XXXXX or XXXXX, as the case may be, makes a supply of the music to the recipient and deducts the tax-included costs from the online account.
However, in the case of XXXXX Cards and XXXXX Cards, XXXXX handles the downloading of music differently. XXXXX Cards and XXXXX Cards once activated provide a period of unlimited access to music downloads or a specified number of downloads respectively. It is also noted that XXXXX is a non-resident and, suffice it to say, XXXXX is not registered for GST/HST purposes.
After entering the PIN or activation code from the XXXXX Card, the recipient has access to a XXXXX website account providing limitless music downloading for the specific time stated on the XXXXX Card. Unlike XXXXX Cards and XXXXX Cards, the XXXXX Cards once activated provide the recipient with a subscription of unlimited music and do not result in the opening or crediting of a money account. XXXXX Cards provide, in general terms, a subscription comprised of the right to unlimited music downloads available through XXXXX website accounts (similar to signing or logging on to a company computer system). XXXXX Cards are exchanged for a supply of a period of unlimited property. XXXXX Cards is for the supply of a subscription and is redeemable for the subscription. Accordingly, XXXXX Cards are gift certificates for GST/HST purposes subject to section 181.2 as XXXXX Cards are for a particular supply of property (in this case, a selection of music), are redeemed for the purchase of property, consideration has been paid, and they have no intrinsic value.
In the case of the XXXXX Card the purchaser may keep the card or transfer it to another person. Upon redemption of the XXXXX Card, by entering the activation code on the XXXXX website, the XXXXX Card is exchanged for a specific number of music downloads. Although GST/HST does not appear to be collected at the time of purchasing the XXXXX Card or downloading music, XXXXX, if a registrant, would be required to collect and account for the GST/HST. If XXXXX is not a registrant, the recipient is liable to self-remit for the applicable GST/HST on the value of consideration of the XXXXX Card at the time it is redeemed since the recipient has acquired the property for use in Canada but XXXXX is considered to make its supply outside Canada.
The PIN or activation code on the XXXXX Card provides access to the XXXXX website that, within XXXXX after validation, permits the number of music downloads stated on the XXXXX Card. Unlike XXXXX Cards, XXXXX Cards and the XXXXX Cards, XXXXX Cards are neither exchanged for an online money account nor a subscription. XXXXX Cards directly provide, in general terms, a specific number of rights (called "credits") to music downloads available through the XXXXX website.
Therefore, XXXXX Cards are considered gift certificates within section 181.2: The XXXXX Cards have value; they can be redeemed for the purchase of any property (in this case, a selection of music); consideration has been given for the XXXXX Cards; and the XXXXX Cards have no intrinsic value. Furthermore, it is also transferable. Accordingly, the supply of XXXXX Cards is not subject to GST/HST at the time of sale to or from the retailer.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-8811 or Ken Syer, Manager, at 613-952-9219.
Yours truly,
William Parker
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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