10 June 1999 GST/HST Interpretation HQR0001663 - Sale of Software Via the Internet and CD-ROM

Dear Sirs:

Thank you for your letter of February 11, 1999, sent by facsimile to XXXXX XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies by your company of software. This letter has been forwarded to the undersigned for response.

In accordance with GST/HST Memoranda Series Section 1.4, an application ruling can only be issued where reference can be made to a clearly defined fact situation of a particular registrant. Rulings are issued upon request and where the taxpayer has presented all the relevant facts such as the nature of the transactions undertaken, detailed descriptions of services or property involved, the parties involved in all transactions, and relevant documentation such as invoices, contracts, prices, and other pertinent agreements. Where all the relevant facts are not provided, an interpretation may be issued. We are therefore pleased to issue you an interpretation which will elaborate on how the GST/HST applies to the questions raised in your letter.

Information Provided:

The following information was provided in your letter and from our telephone conversation of May 14, 1999:

•   XXXXX a resident of Canada and is registered for GST/HST purposes XXXXX[;]

•   XXXXX is a software development company and distributor of its own software, with offices located in XXXXX[;]

•   Your target market for your software is a well-defined group of XXXXX XXXXX[;]

•   The software is supplied by way of a non-exclusive non-transferable licence agreement;

•   You intend to sell this software using two channels:

1. Via electronic-commerce (the internet). Your clients visit your website and if they want to purchase the software they:

a) pay for the software; and then

b) download this software directly on their computer.

2. Purchase the software by way of CD-ROM:

a) a client calls you and orders the CD-ROM; and then

b) you arrange for shipment sending the CD-ROM by courier.

•   You may replace the CD-ROMs with 3 1/2 inch computer diskettes which cost approximately XXXXX[;]

•   The software will retail for approximately XXXXX[.]

Interpretation Requested

1. Whether you have to charge and collect GST/HST to your clients if the software is downloaded by your clients via the Internet in XXXXX[.]

2. Whether you have to charge and collect GST/HST to your clients if you sell the software by CD-ROM or diskette and arrange shipment to clients in XXXXX[.]

3. Whether there are any applicable custom or excise taxes to the software you are exporting.

Interpretation Given

Based on the information provided we offer the following interpretation:

A universal non-exclusive non-transferable licence for the right to use software which is not custom software can be a supply of intangible personal property ("IPP") or tangible personal property ("TPP") depending upon the medium by which it is supplied. When supplied by the delivery of the software by electronic means it is a supply of IPP and when supplied by CD-ROM or diskette it is a supply of TPP.

In the case of supply made electronically, as it appears that the IPP may be used in whole or in part in Canada, the supply is deemed to be made in Canada under the provisions of subparagraph 142(1)(c)(i) of the Excise Tax Act (the "ETA"). The fact that the software is supplied to clients outside of Canada is irrelevant when determining the place of supply of IPP. Although a recipient may never use the IPP in Canada, the supply is deemed to be made in Canada pursuant to subparagraph 142(1)(c)(i) of the ETA if the IPP may be used in whole or in part in Canada.

In the case of supply by way of sale by CD-ROM or diskette, where the TPP is, or is to be, delivered or made available in Canada to the recipient of the supply, the supply shall be deemed to be made in Canada pursuant to paragraph 142(1)(a) of the ETA and therefore subject to GST/HST. Where, however, the supply by way of sale of TPP is, or is to be, delivered or made available outside of Canada to the recipient of the supply, the supply shall be deemed to be made outside of Canada pursuant to paragraph 142(2)(a) of the ETA and therefore not subject to Division II GST/HST.

Recipients of a taxable supply made in Canada (which is not a zero-rated supply) are required to pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply (subsection 165(1) of the ETA). Generally, every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect this tax (subsection 221(1) of the ETA). On April 1, 1997, the harmonized sales tax (HST) replaced the 7% goods and services tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%. Consequently, recipients of a taxable supply made in a participating province (which is not a zero-rated supply) are required to pay tax in respect of the supply at the harmonized rate.

Place of Supply Rules for IPP

Whether a supply of either IPP or TPP made in Canada is made in a participating or non-participating province is determined by section 144.1 and Schedule IX to the ETA. Section 144.1 provides that a supply is deemed to be made in a province if it is made in Canada and is, under the rules set out in Schedule IX, made in the province. Also, a supply made in Canada that is not made in any participating province is deemed to be made in a non-participating province.

The place of supply rules in Canada for supplies of IPP that do not relate to real property, tangible personal property or services are provided for in paragraphs 2(d) and 3(d) of Part III of Schedule IX to the ETA. Subparagraph 2(d)(i) of Part III of Schedule IX to the ETA states that a supply of IPP is considered to be made in a province if all or substantially all of the Canadian rights in respect of the IPP can be used only in the province. "Canadian rights" refers to that part of the IPP that can be used in Canada (section 1 of Part III of Schedule IX to the ETA). It appears that the use of the XXXXX software is not limited in any manner to any specific province in order to make this provision applicable.

Subparagraph 2(d)(ii) of Part III of Schedule IX to the ETA states that a supply of IPP will be considered to be made in a province if the place of negotiation of the supply is in the province, and the property can be used otherwise than exclusively outside the province. Section 1 of Part I of Schedule IX to the ETA defines the "place of negotiation" of a supply as "... the location of the supplier's permanent establishment at which the individual principally involved in negotiating for the supplier the agreement for the supply ordinarily works ...". While XXXXX permanent establishment is in XXXXX[.] Subparagraph 3(d)(i) of Part III of Schedule IX to the ETA states that a supply of IPP will be considered to be made in a participating province if the Canadian rights in respect of the IPP cannot be used otherwise than primarily in the participating provinces. As above, it appears that the use of the software is not limited in any manner to any specific province in order to make this provision applicable.

As stated earlier, section 144.1 provides that where a supply made in Canada is not made in any participating province it is deemed to be made in a non-participating province. Consequently, tax in respect of the supply of the software as IPP by XXXXX calculated at the GST rate of 7% on the value of the consideration for the supply (subsection 165(1) of the ETA). This would include a supply made to a purchaser located outside of Canada, unless the supply is zero-rated (subsection 165(3) of the ETA).

Self Assessment Rules

However, the recipient of a supply of IPP in a participating province may be required to self-assess the provincial component of the HST, this being 8%, on that part of the consideration for the supply of the software that is attributable to a period on or after April 1, 1997, pursuant to subsection 220.08(1) of the ETA. Subsection 220.08(1) of the ETA provides that when a person who is a resident of a participating province is the recipient of a taxable supply of IPP that is acquired by that person for consumption, use or supply primarily in a participating province, that person must self-assess the provincial component of the HST. Nevertheless, pursuant to subsection 220.08(3), this self-assessment is not required in respect of IPP included in Part II of Schedule X to the ETA. This includes a supply of property to a registrant acquired for consumption, use or supply exclusively in the course of the commercial activities of the registrant (section 1 of Part II of Schedule X to the ETA).

A universal non-transferable licence of a right to use computer software is considered a supply of a right to use intellectual property. Consequently, provided the supply of IPP is made to a non-resident person who is not registered for GST/HST purposes at the time the supply is made, the supply may be zero-rated pursuant to section 10 of Part V of Schedule VI to the ETA. A zero-rated supply is taxed at the rate of 0% on the value of the consideration for the supply (subsection 165(3)).

Place of Supply Rules for TPP

The place of supply rules in Canada for supplies of TPP by way of sale are provided for in sections 1 and 3 of Part II of Schedule IX to the ETA. Section 1 provides that a supply by way of sale of TPP is made in a province if the supplier delivers the property or makes it available in the province to the recipient of the supply. Pursuant to section 3, property is deemed to be delivered in a particular province by a supplier where the supplier

(a) ships the property to a destination in the particular province that is specified in the contract for carriage of the property or transfers possession of the property to a common carrier or consignee that the supplier has retained on behalf of the recipient to ship the property to such a destination; or

(b) sends the property by mail or courier to an address in the particular province.

Consequently, tax in respect of the supply of the software as TPP by XXXXX calculated at the GST rate of 7% or the HST rate of 15% on the value of the consideration for the supply depending on where in Canada the supplier delivers the property or makes it available to the recipient of the supply (subsection 165(1) of the ETA).

Whether there are any applicable custom or excise taxes to the supply of software which you are exporting is not a matter to be responded to by this Directorate. We have enquired with individuals at the Directorate below, which is responsible for such matters, and they advise that no such custom or excise taxes apply. We suggest, however, that you address this question to them directly at the address below:

Excise Duties and Taxes Directorate
Attention: Mr. Bill Gray
A/Director, Excise Taxes and Special Levies
Place de Ville, Tower 'A', 20th Floor
Ottawa, Ontario
K1A 0L5
(613) 952-0178

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-2560.

Yours truly,

Richard Aronoff
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate