7 September 2000 GST/HST Interpretation 31593 - Direct Sellers and Sales Aids

Dear XXXXX

Thank you for your letter of June 6, 2000 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to direct sellers and sales aids .

XXXXX is a chartered accounting firm located in XXXXX, XXXXX. Your firm understands that:

1. Sales aids sold by a direct seller to an independent sales contractor (ISC) are not subject to tax;

2. If the ISC is not a registrant then the ISC does not need to charge tax on the resale of items included in the sales aid;

3. A non-registrant ISC purchases a sales kit from the direct seller and uses it as a sales aid. If the sales aid is subsequently personally consumed by the ISC after it is no longer useful as a sales kit, the ISC would not be required to self assess the GST;

4. If the direct seller invoices the sales kit item to the ISC, tax must be collected on the invoiced supplies of sales aids; and

5. An ISC who is a registrant purchases a sales kit from the direct seller and uses it as a sales aid. The ISC needs to charge or self assess the GST when reselling or personally consuming items included in the sales kit after the sales kit is no longer useful as a sales aid.

Interpretation Requested

You have requested confirmation of your understanding of the issues outlined in No. 1 to No. 5 above.

Interpretation Given

1. Are sales aids sold by a direct seller to independent sales contractors (ISC) subject to GST?

Subsection 178.5(5) of the Excise Tax Act (ETA) provides that where an approval for a direct seller to use the alternate Collection Method (ACM) under section 178.3 is in effect and the direct seller or an ISC of the direct seller makes a taxable supply in Canada by way of sale of a sales aid to an ISC of the direct seller, that supply is deemed not to be a supply. As a result, the sale, of the sales aid by the direct seller to the ISC in this case is not subject to tax.

A sales aid means personal property that is acquired, manufactured or produced by a direct seller or independent sales contractor (ISC) for sale to assist in the promotion, sale or distribution of exclusive products of the direct seller. Sales aids include customized business forms, samples, demonstration kits, catalogues and promotional or instructional items. Exclusive products are specifically excluded from the definition of sales aid as is property sold, or held for sale, to an ISC who is acquiring it for use as capital property. A proposed amendment to the definition of sales aid provides that a sales aid includes shipping, handling and order processing services related to exclusive products of the direct seller or to items in the existing definition of sales aid.

2. Does a non-registrant ISC need to charge GST when reselling items included in the sales kit?

To the extent that a sales aid is sold by an ISC to someone other than an ISC, subsection 178.5(5) of the ETA does not apply. As a result, the supply of the sales aid falls under the regular rules of the ETA. Tax is not applicable to the supply of the sales aid made by a non-registrant ISC.

3. An ISC who is not a registrant purchases a sales kit from the direct seller and uses it as a sales aid. If the sales aid is subsequently personally consumed by the ISC, after it is no longer useful as a sales kit, would the ISC be required to self assess the GST?

The non-registrant ISC would not be required to self-assess tax on the sales aid that is personally consumed after it has been used by the ISC as a sales aid.

4. If the direct seller invoices the sales kit item to the ISC, must GST be collected by the direct seller?

As previously indicated in the response to question #1, subsection 178.5(5) of the ETA states that when a direct seller or an ISC makes a taxable supply of a "sales aid" to an ISC, it shall be deemed not to be a supply. Tax is not required to be collected by the direct seller on the sales aid, regardless of whether the consideration for the sales aid is invoiced by the direct seller, since the supply is deemed not to have taken place.

5. An ISC who is a registrant purchases a sales kit from the direct seller and uses it as a sales aid. Does the ISC need to charge or self assess the GST when reselling or personally consuming items included in the sales kit after the sales kit is no longer useful as a sales aid?

The supply by way of sale of a sales aid by a registrant ISC to a person other than an ISC or that is personally consumed by the ISC falls under the regular rules of the ETA.

As a result, the ISC would be required to charge tax on the supply of the sales aid outside the chain of contractors to the extent that it is a taxable (other than zero-rated) supply made in Canada.

Also, subsection 172(1) of the ETA provides a self-assessment rule where a registrant who is an individual appropriates property, which was acquired in the course of commercial activities of the registrant, for personal consumption, use or enjoyment of the registrant or another individual related to the registrant. In this case the registrant is deemed to have supplied the property for consideration equal to its fair market value and to have collected tax on that consideration. The registrant (in this case the ISC) must therefore account for tax on the appropriation in the same manner as if the registrant had sold the property to a person with whom he or she was dealing at arm's length.

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 Canada Customs and Revenue Agency 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 613-954-9700.

Yours truly,

Donato Licursi
Services and Intangible Property Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate