28 March 2003 GST/HST Ruling 40372 - Internet Advertising

Dear XXXXX:

Thank you for your letter XXXXX which was submitted via facsimile by the constituency office of XXXXX to GST/HST Rulings in XXXXX. In the letter you ask that we confirm the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies made by XXXXX. Your request was forwarded to us for reply. We apologize for the delay in providing you with this response.

Statement of Facts

Our understanding of the facts is based on your letter, your telephone conversation with staff of the XXXXX, our telephone conversation XXXXX, the information on XXXXX and a copy of a sample agreement that you faxed to us XXXXX and is as follows:

1. XXXXX, is registered for purposes of the GST/HST XXXXX.

2. XXXXX operates an on-line shopping portal where it advertises products for sale on behalf of various vendors.

3. XXXXX creates and hosts electronic XXXXX on its Web site. The product page is an advertisement showcasing a vendor's specific product.

4. A vendor enters into an XXXXX Agreement XXXXX with XXXXX whereby XXXXX agrees to create the product page(s) for the vendor and advertise the product on its Web site in accordance with the terms of a specified advertising package.

5. A vendor may choose from one of the following five advertising packages offered by XXXXX, which vary in features offered as well as price:

XXXXX

6. A shopper visiting the XXXXX Web site can browse the product pages and place orders on-line. The shopper completes the on-line order form and makes payment for the goods on-line using a credit card.

7. All orders made through the XXXXX Web site are transmitted via e-mail to the vendor who is responsible for accepting and filling the orders. XXXXX has no contractual relationship with the shoppers. With respect to the supply made by the vendor, XXXXX does not act as agent in making the supply.

8. In addition to the price charged for the particular advertising package, the vendor is required to pay XXXXX, pursuant to the XXXXX Agreement XXXXX, a "commission" on the sale of the products made through the XXXXX Web site. The "commission" is equal to XXXXX % of the retail sale price of each product sold, excluding shipping charges.

9. XXXXX forwards to the vendor any payment received in respect of the sale of the products made through its Web site less the XXXXX % amount it retains.

10. XXXXX does not warehouse stock or handle tangible personal property (goods) in any capacity. There is no transfer of rights in goods or for the use of goods between XXXXX and the vendors.

11. Where goods of a non-resident vendor are purchased by a resident in Canada, the purchaser is the importer of the goods and liable to pay any duties and taxes (including the GST/HST) applicable at time of importation.

12. Where the vendor is a non-resident individual and is registered for GST/HST purposes at the time the supply is made by XXXXX, the non-resident is not in Canada at any time the non-resident has contact with XXXXX in relation to the supply made by XXXXX.

13. Where the vendor is a non-resident and is registered for GST/HST purposes at the time the supply is made by XXXXX, XXXXX service is not rendered to an individual while the individual is in Canada.

14. All activities carried on in Canada by XXXXX are carried out in XXXXX.

Ruling Requested

1. Is XXXXX required to collect the GST/HST on the fee charged to a vendor for advertising the vendor's product on XXXXX Web site, including the creation of the product page?

2. Is XXXXX required to collect the GST/HST on the "commission" payable by the vendor?

Ruling Given

Based on the facts set out above, we rule that:

1. Under the XXXXX Agreement, XXXXX is supplying an advertising service to the vendor;

2. the supply of the advertising service is made in Canada and is subject to the GST at a rate of 7% when the service is provided to a vendor who is resident in Canada;

3. when the supply of the advertising service is made to a non-resident person, that supply is zero-rated (i.e., taxed at a rate of 0%) pursuant to section 7 or section 8 of Part V of Schedule VI to the Excise Tax Act (ETA); and

4. the XXXXX % amount charged by XXXXX to a vendor is additional consideration in respect of the advertising service and will have the same tax treatment as described above.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of the GST/HST Memoranda Series. We are bound by this ruling 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 term "advertising" is not defined in the ETA, however, the Canada Customs and Revenue Agency (CCRA) has provided an explanation as to what is generally considered to be an advertising service for GST/HST purposes in section 4.5.3, Exports - Services and Intellectual Property of the GST/HST Memoranda Series (copy enclosed). The explanation in this section refers to a service of creating a message and a service directly related to the communication of such a message. Further, the message must be oriented towards soliciting business, attracting donations, or calling public attention in the form of an information notice, a political announcement, or other similar communication.

Based on the above facts, XXXXX creates and communicates messages for the purpose of soliciting business for the vendors. As such, XXXXX is supplying an advertising service to the vendors.

Pursuant to subsection 142(1) of the ETA, a supply of a service (including an advertising service), other than a service in relation to real property, is deemed to be made in Canada if the service is, or is to be, performed in whole or in part in Canada. Given that XXXXX carries out activities in Canada in relation to the provision of the advertising service, the supply of the advertising service is performed in whole or in part in Canada. Therefore, the supply of the advertising service is deemed to be made in Canada.

A supply of a taxable service that is deemed to be made in Canada is subject to the GST at the rate of 7%, or the HST at 15%, where the supply is deemed to be made in a participating province (i.e., Nova Scotia, New Brunswick or Newfoundland and Labrador), unless the supply of the service is zero-rated (i.e., taxed at 0%). Based on the information provided, the advertising services provided by XXXXX are not considered to be made in a participating province. As such, XXXXX is required to charge the GST at a rate of 7% on its supplies of advertising services made in Canada, even where the recipient (i.e., a vendor) is located in a participating province, unless the supply is zero-rated.

A supply of an advertising service that is made in Canada, but is made to a non-resident person who is not registered for purposes of the GST/HST at the time the service is performed, is a zero-rated supply pursuant to section 8 of Part V of Schedule VI to the ETA. As such, XXXXX supply of an advertising service to a non-resident person who is not registered for GST/HST purposes at the time the service is performed, is taxed at 0%.

If the non-resident person is registered for purposes of the GST/HST at the time the service is performed, the service may still be zero-rated under the general zero-rating provision for the export of services found in section 7 of Part V of Schedule VI to the ETA. This section zero-rates a supply of a service made to a non-resident person unless specifically excluded by paragraphs 7(a) through 7(h) of that section (the exclusions to this section are discussed in paragraphs 18 - 23 of the enclosed section 4.5.3 of the GST/HST Memoranda Series). For example, a supply of a service made to a non-resident person is excluded from zero-rating under this section when the non-resident person is an individual who is in Canada at any time when the individual has contact with the supplier in relation to the supply of the service, or, when the service is rendered to an individual while that individual is in Canada. Under these circumstances, the above ruling does not apply and XXXXX supply of the advertising service to the non-resident is subject to the GST at 7%.

Note, it is the supplier's responsibility to verify that the recipient of a supply is a non-resident and is not registered for GST/HST purposes (where required). For your information, we have enclosed section 4.5.1, Exports - Determining Residence Status of the GST/HST Memoranda Series. Appendix A of this Memorandum describes the documentation that the CCRA will generally accept as proof that the recipient of the supply is not resident in Canada and

Appendix B describes the documentation that the CCRA will usually accept as proof that the recipient is a non-resident person and not registered for purposes of the GST/HST.

Interpretation

In addition to the above, you had submitted some scenarios outlining the flow of goods and had requested information on whether XXXXX was required to collect the GST/HST on behalf of the vendors in respect of the sale of goods. Given that XXXXX is not the supplier of the goods, XXXXX has no liability under the ETA to charge the GST/HST in respect of the sales made by the vendors.

As we discussed in our telephone conversation, whether a particular vendor is required to charge GST/HST on the sale of goods will depend on the specific circumstances of the vendor and the particular supply. For example, a vendor may be a small supplier who is not registered for GST/HST purposes and therefore not required to collect an amount of GST/HST in respect of its supplies. As another example, a vendor who is registered for GST/HST purposes is generally required to collect 7% GST or 15% HST for taxable supplies made in Canada, however, under certain circumstances, the supplies may be zero-rated (i.e., taxed at 0%). As such, to determine whether or not a particular supply made by a particular vendor is subject to tax, XXXXX should seek information from the particular vendor. If the vendor requires information with respect to the application of the GST/HST, the vendor may contact their local CCRA office.

It should be noted that where XXXXX collects amounts as or on account of GST/HST, it is required to include those amounts in its net tax for the reporting period. Where the amounts collected, including the GST/HST, are passed on to the vendor and XXXXX does not account for the GST/HST in its net tax, it is the CCRA's position that XXXXX liability to account for the tax is extinguished when the vendor has accounted for the GST/HST in its net tax and remitted any net tax owing.

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 the GST/HST Memoranda Series, do not bind the CCRA with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8530.

Yours truly,

Dwayne Moore
Electronic Commerce Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate