29 June 2000 GST/HST Interpretation 7647 - Craft Sales

XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX

Excise and GST/HST Rulings Directorate 16th Floor, Tower A, Place De Ville 320 Queen Street Ottawa, Ontario K1A 0L5Case 7647June 29, 2000

Subject:

Craft Sales

Dear XXXXX:

As discussed, this is further to an enquiry sent to us on July 17, 1998, from XXXXX in the XXXXX Tax Services Office in respect of the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of crafts in the context of agreements between crafters and a craft sales establishment.

Note that although background material relating to various craft sale arrangements was provided, we have limited our review and interpretation to the XXXXX (the "establishment") arrangement. This arrangement is nevertheless typical of the others for the most part.

Facts

1. Each establishment is home to numerous booths in which individual crafters showcase their crafts to consumers. Crafters rent and decorate their booth, price and tag their crafts and leave them in the booth for sale to consumers. Once a consumer decides to purchase a craft displayed in a booth, the consumer pays for it at the store's central cash.

2. The establishment is a registrant and the crafters may or may not be registrants (some crafters sell their crafts through multiple stores).

3. The receipt issued to the consumer bears the establishment's name as well as the vendor number assigned to the crafter whose items have been purchased.

4. The identity of some of the crafters is fully disclosed in the booth, while the identity of others is not disclosed beyond their vendor number. Given the diversity of the crafts from booth to booth, it is evident in the store that the crafts in each booth are being sold by different crafters.

5. The written XXXXX ("the agreement") between a crafter and the establishment provides for the granting of a licence to the crafter to occupy a booth XXXXX crafter's merchandise for a determined period of time. The agreement provides for a determined XXXXX licence fee to be paid to the establishment for the rental of the booth. Licence fees outstanding for more than XXXXX XXXXX[.]

6. The XXXXX further to the agreement require that each price tag have a dealer number assigned by the establishment, the inventory number XXXXX and the price. The agreement provides that XXXXX[.]

7. The agreement provides that the establishment shall forward to the crafter payment for all sales of the inventories of the crafter made during the XXXXX period prior to the date of remittance, less any amounts which must be remitted for federal or provincial taxes.

8. The agreement further provides that the establishment is entitled to deduct a XXXXX XXXXX fee (corresponding to XXXXX XXXXX XXXXX) of the total value of all the crafter's inventories sold during the relevant period. The promotional literature soliciting crafters to join the scheme indicates that the XXXXX fee is for XXXXX[.]

9. The agreement provides XXXXX[.]

10. In the agreement, the establishment commits to determined opening days and hours.

11. The agreement provides for a non-competition clause prohibiting the crafter from XXXXX, XXXXX, while in the establishment for the XXXXX to sell crafts somewhere other than the establishment.

12. The agreement provides for the right to the establishment to terminate the sales XXXXX of the crafter when XXXXX XXXXX.

13. The agreement provides that the crafter XXXXX[.]

14. The agreement provides that the XXXXX[.]

15. The agreement requires the crafter to XXXXX XXXXX[.]

16. The XXXXX further provide that the store XXXXX. XXXXX[.]

Interpretation Requested

An interpretation was requested with respect to the following issues:

1. Whether, in the fact pattern described in this letter, the establishment is acting as an agent of the crafter in making the supply of crafts to the consumers or is rather buying and reselling the crafts.

2. Based on the response to the previous question, how tax should be accounted for by the parties.

Interpretation Given

1. As set out in policy P-182, our position is that a person will be considered and treated for GST/HST purposes as an agent based on fact and the principles of law.

Based on policy P-182, the agreement and the actions of the parties, it would appear that the establishment in this case is acting as an agent on behalf of the crafter in making a supply of the crafts to consumers. As a result, section 177 of the Excise Tax Act (ETA) would be relevant in determining how tax is to be accounted for in the context of the arrangement. Before reviewing the application of section 177, however, we would first like to provide a summary of our analysis of the application of policy P-182.

A preliminary issue to consider is whether the establishment is buying and reselling the craft or merely making a supply of the craft on behalf of the crafter.

In the context of the arrangement in this case, it does not appear that the establishment obtains ownership of the crafts, nor that it is a recipient of a supply of the crafts, for various reasons including:

•   The agreement between the parties does not contemplate, either explicitly or implicitly, a transfer of ownership of the crafts from the crafter to the establishment. XXXXX[.]

•   There is no indication in the agreement that the establishment has agreed to purchase the crafts at any time. The focus of the agreement between the crafter and the establishment is for a supply of XXXXX a particular booth for which a fixed licence fee is charged. If crafts are sold through the booth, the establishment becomes entitled to charge a XXXXX fee to the crafter, which, in the context of the arrangement, would be analoguous to a commission.

•   The sales fee is to be calculated as a percentage of the total value of the crafter's sales. Though not determinative, a further indication that the parties view the sales of crafts to consumers as being made by the crafter would be if the amount being forwarded to the crafter by the establishment is, in fact, being calculated as a percentage of the gross sales value to consumers.

A review of the essential qualities of agency outlined in policy P-182 in relation to this case yields the following results:

Consent of both the Principal and the Agent

Although the agreement between the parties does not expressly authorize the establishment to act as the crafter's agent, this does not mean that an agency relationship does not exist at law.

The grant of authority by a principal may be expressed or implied. An agency relationship may be created by the behaviour and actions of the parties if consent is not explicit. It is important to identify the true intention of the parties with respect to their involvement in the transactions (in this case, the sale of crafts to consumers) and their respective roles in relation to those transactions.

The actions of the parties in this case suggest that an agency relationship exists between the crafter and the establishment. As previously indicated, it does not appear that the establishment is purchasing and reselling the crafts. In this context, when the crafter leaves the crafts for sale to consumers in the booth in the establishment, the crafter is effectively consenting to allow the establishment to subsequently conclude the sale of the crafts to consumers on the crafter's behalf.

Authority of the Agent to Affect the Principal's Legal Position

As policy P-182 indicates, the concept of an agent binding a principal refers to the ability of the agent to affect the legal position of the principal, particularly with respect to third parties.

The crafter is bound to the sale of the crafts to consumers once the sale is concluded by the establishment. Again, the fact that the crafter leaves the crafts in the booth in the environment of the establishment suggests that the crafter has empowered the establishment to conclude the sale of the crafter's goods to consumers.

The Principal's Control of the Agent's Actions

With respect to the sales of the individual crafts, the crafter determines the price at which the crafts will be sold. Though the establishment may offer a fixed discount for a limited period of time, it is only done with the prior consent of the crafter.

Subject to the general conditions regarding the sale of crafts in the establishment to ensure that a certain quality level of crafts is maintained in the overall establishment, the crafter also determines the type and quantity of crafts to be sold in the crafter's booth and the marketing of those crafts in the booth.

In addition to the essential qualities of agency, Policy P-182 also sets out a number of indicators that are useful in ascertaining whether an agency relationship exists. We would simply point out that these indicators also suggest that an agency relationship exists between the establishment and the crafter.

Finally, with respect to the issue of the existence of an agency relationship, as you know, we do not rule on whether an agency relationship exists where the relationship in question is already established or ongoing. This interpretation is intended to provide an indication of how we would view the relationship between the parties with respect to the sale of the crafts to consumers. Though the facts of this case suggest an agency relationship, in the absence of a representation having been made by the affected parties in this regard, it would be important to ascertain from them whether they perceive an agency relationship to exist.

2. As previously indicated, if the establishment is in fact acting as an agent of the crafter, the application of section 177 of the ETA should be considered. It is important to note, however, that the net tax of the parties will be the same whether the crafts are sold through an agency relationship or buy and resell. The net tax of each of the parties in either case would only vary according to whether the crafter is a registrant or not (or if the subsection 177(1.1) election is made), although the overall combined net tax result of the parties would remain the same.

The following is a detailed analysis of the respective obligations of the parties to account for tax in various possible scenarios, if an agency relationship exists.

A. Where the Crafter Has the Obligation to Collect Tax

Where the crafter has the obligation to collect tax (generally as a result of being a registrant), there are two possibilities of tax treatment: treatment under the general scheme of the ETA, or treatment under the rules of subsection 177(1.1), applicable where the crafter and the establishment make a joint election.

(i) General rule, i.e., where no election has been made under subsection 177(1.1) of the ETA

The principal (in this case, the crafter) is the supplier of the craft to the final consumer and is treated as such. This means that the crafter will be required to account for tax on that supply made through the agent (the establishment).

The tax in respect of the supply of renting the booth and the tax in respect of the supply of operating the sale (the commission) is payable by the crafter and is to be accounted for by the establishment, which is the supplier of these two supplies. The establishment has the obligation to collect and account for the tax payable on these two supplies.

As a registrant, the crafter will be entitled to claim ITCs for the tax payable on the establishment's commission for operating the sales and the tax payable on the consideration for renting the booth, provided that all the conditions for claiming the ITCs are met.

(ii) Where an election under subsection 177(1.1) of the ETA has been made

Subsection 177(1.1) of the ETA permits an agent who makes a supply (otherwise than by auction) on behalf of a principal who is required to collect tax in respect of the supply to elect jointly with the principal to account for the tax collectible on the supply as if the tax were collectible by the agent. Thus, the agent is responsible for collecting, reporting and remitting the tax on the supply. However, the agent and the principal are jointly and severally liable for all obligations that arise upon or as a consequence of the tax becoming collectible or any failure to account for or remit the tax. The election has to be made in the prescribed form, i.e., on form GST506 (Election and Revocation of an Election Between Agent and Principal).

In the case in question, both the establishment and the crafter would have to be registrants to make the election. If the establishment and a crafter jointly make the election, the establishment will assume the obligation to collect and remit the tax payable for the supply of crafts made to the consumer through the agency relationship.

The treatment of the establishment's commission and the rental of the booth would still be subject to the general rules. The tax in respect of the supply of renting the booth and in respect of the supply of operating the sale is payable by the crafter and is to be accounted for by the establishment, which is the supplier of these two supplies.

The crafter will be entitled to claim input tax credits (ITCs) for the tax payable on the establishment's commission for operating the sales and the tax payable on the consideration for renting the booth, provided that all the conditions for claiming the ITCs are met.

No election can be made under subsection 177(1.1) of the ETA where an election has been made under paragraph 177(1)(d). In the case in question, the 177(1)(d) election does not appear to be relevant to the extent that the election is available for supplies not made in the course of commercial activities.

B. Where the Crafter Does not Have the Obligation to Collect Tax

Subsection 177(1) of the ETA provides for special rules for certain supplies made through agency relationships. Where a registrant (the establishment), in the course of its commercial activity, acts as agent in making a supply (except by auction) of tangible personal property (excluding exempt or zero-rated supplies) on behalf of a principal (the crafter) who is not required to collect tax in respect of the supply, the supply will be deemed to be a taxable supply made by the agent and not by the principal. Furthermore, the agent (the establishment) is deemed not to have made a supply to the principal (the crafter) of services relating to the supply of the property to the recipient. The effect is that the agent must account for the tax payable on the consideration for the supply of the property to the recipient in its GST/HST return, and remit any positive amount of net tax but will not collect the tax from the principal for its services relating to the supply of the property.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8815.

Yours truly,

Raymond Labelle
A/Technical Officer
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

Att.

c.c.:

P. McKinnon XXXXX R. Labelle (no attachment)

Attachment:	Memorandum by XXXXX to the attention of Adrien Venne, dated July 17, 1999.
	Agreement between XXXXX and a crafter.
National Coding:	11725-1XXXXX XXXXX XXXXX XXXXX XXXXX