12 July 2002 GST/HST Ruling 32742 - Distribution of Digitized Artwork

Dear XXXXX

Thank you for your letter to the XXXXX GST/HST Rulings Centre of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the distribution of digitized artwork. Your request was transferred to us for response. We apologize for the delay in responding to your enquiry.

Statement of Facts

Our understanding of the facts is as follows:

XXXXX a GST/HST-registrant, distributes digitized artwork (the Artwork) to resident and non-resident clients, such as newspapers and magazines. XXXXX[']s office and server are both situated in XXXXX.

To access the Artwork, a client must first register with XXXXX. While logged in to XXXXX's Web site (XXXXX), the client can "buy and download" the Artwork. They have access to it for 24 hours from the first download. When buying the Artwork, they can also choose currency and payment options.

The "Terms of Use" of the Licence agreement (the Agreement) stipulates that XXXXX grants the client a personal, non-transferable, non-exclusive licence, for a one-time use of the selected Artwork in the client's print or on-line product. Under the Agreement, the client is authorized to utilize each piece of Artwork purchased in one publication only. In the event that the client wishes to further use the Artwork in any means, the client must first obtain written consent from XXXXX and pay the applicable fees. The client agrees to publish with each piece of Artwork any credit line and trademark or copyright notice [or both] that is included with the Artwork. In addition, XXXXX has the right to restrict or withhold any Artwork, and maintains the right to immediately revoke a licence granted. The Agreement does not restrict the use of the Artwork to any one province, territory or country.

Ruling Requested

You have requested clarification on the tax status of the Artwork when supplied to clients in Canada including those who are located in a participating province (Nova Scotia, New Brunswick and Newfoundland and Labrador). However, as XXXXX's clients include non-residents, and to provide you with a complete response, we shall also address the tax status of the Artwork when supplied to clients who are non-residents.

Ruling Given

Based on the facts set out above, we rule as follows:

XXXXX's supply of the Artwork is deemed to be made in Canada, pursuant to subsection 142(1) of the Excise Tax Act (ETA).

We further rule that XXXXX's supply of Artwork that is downloaded off its Web site by:

1. a resident client is subject to the GST at a rate of 7%, pursuant to subsection 165(1) of the Excise Tax Act (ETA) whether or not the client is located in a participating province;

2. a non-resident client who is registered under Subdivision d (This Subdivision includes the requirements for registration for GST/HST purposes.) of Division V of Part IX of the ETA at the time the supply is made is subject to the GST at a rate of 7%, pursuant to subsection 165(1) of the ETA; and

3. a non-resident client who is not registered under Subdivision d of Division V of Part IX of the ETA at the time the supply is made is zero-rated under section 10 of Part V of Schedule VI to the ETA.

These rulings are subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by these rulings provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the ETA, or to our interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.

Explanation

The supply of the right to use XXXXX's Artwork is a supply of intangible personal property (IPP). A taxable [other than zero-rated] supply of IPP made in Canada is subject to GST at the rate of 7% or HST at the rate of 15% [where the supply is made in a participating province]. A taxable supply that is zero-rated is taxed, under subsection 165(3) of the ETA, at a rate of 0%.

As stipulated in paragraph 142(1)(c) of the ETA, a supply of IPP is deemed to be made in Canada if the IPP may be used [meaning "allowed to be used"] in whole or in part in Canada. As the Agreement does not restrict use of the Artwork exclusively to "in Canada" or "outside Canada", under this paragraph, the supply is deemed to be made in Canada since the Artwork may be used in Canada.

Section 144.1 of the ETA works in conjunction with the rules set out in Schedule IX to the ETA to determine the province in which the supply is made.

As the Artwork is IPP that is not related to real property, tangible personal property or services, paragraphs 2(d) and 3(d) of Part III of Schedule IX to the ETA must be examined when determining the place of supply for the Artwork. Subparagraph 2(d)(i) of this Part states that a supply of IPP is considered to be made in a province if all or substantially all [90% or more] of the Canadian rights (Section 1 of Part III of Schedule IX to the ETA defines "Canadian rights", in respect of IPP, to be that part of the property that can be used in Canada.) in respect of the IPP can be used only in the province. Where there are no restrictions regarding which province or groups of provinces the IPP can be used, subparagraph 2(d)(i) and similarly, paragraph 3(d) of this Part are not 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 (Section 1 of Part I of Schedule IX to the ETA defines "place of negotiation" to be "... 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 ...") of the supply is in the province, and the IPP can be used otherwise than exclusively outside the province. Where there are no restrictions regarding the province in which the IPP can be used, it will always be the case that the IPP can be used otherwise than exclusively [90% or more] outside the province where the place of negotiation occurred. Therefore, as a GST/HST-registrant with a permanent establishment in XXXXX that is the place of negotiation, the supplies of the Artwork by XXXXX are deemed to be made in XXXXX, a non-participating province. As such, XXXXX is required to collect the GST at a rate of 7% on the supply of the Artwork even in cases where the recipient of the Artwork may be located in a participating province.

The next step is to ascertain whether there is a zero-rating provision that could apply to the Artwork. Under section 10 of Part V of Schedule VI to the ETA, the supply of, or the right, licence or privilege to use, IPP that is intellectual property is zero-rated when supplied to a non-registered non-resident person. Intellectual property includes an invention, patent, trade secret, trademark, trade name, copyright, or industrial design. Under these conditions, XXXXX is able to zero-rate its supply of Artwork to a non-registered non-resident client.

For your information, we have enclosed GST/HST Memoranda Series Chapter 4.5.1, Exports - Determining Residence Status. Appendix B of this Memorandum describes the documentation that Canada Customs and Revenue Agency will generally accept as proof that the recipient is both not resident in Canada and not registered for GST/HST purposes. Also enclosed is GST/HST Memoranda Series Chapter 4.5.3, Exports - Services and Intellectual Property.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8806.

Yours truly,

Marjorie Stevens
Electronic Commerce Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate