25 February 2003 GST/HST Interpretation 41194 - Supplies of Books Made Via the Internet

Dear XXXXX:

Thank you for your letter XXXXX to the XXXXX GST/HST Rulings XXXXX Centre concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies of books made by XXXXX (your client) via the Internet. Your letter was forwarded to us for reply and we apologize for the delay in responding to your request.

Our understanding from your letter, your facsimile XXXXX and our telephone conversations is that your client is involved in XXXXX different areas of business. The XXXXX GST/HST Rulings Centre has previously answered your questions with respect to XXXXX of these areas of business. This letter will address only your client's book sales made via the Internet.

It is also our understanding that:

•   your client is located in XXXXX and is registered for GST/HST purposes;

•   your client makes supplies by way of sale of electronic books via the Internet;

•   customers can order the books XXXXX through XXXXX of your client's Web sites XXXXX XXXXX[;]

•   the server hosting the Web sites is located in XXXXX;

•   upon successful completion of ordering an electronic book and confirmation of payment to your client, the customer receives an e-mail containing the XXXXX XXXXX which can be downloaded or, in the case of the XXXXX electronic book, an e-mail containing a link to a site they must visit in order to download the book;

•   in the case of the XXXXX, the customer may print a copy and distribute such copy to an individual or family member who cannot afford to purchase and access it; and

•   there are no restrictions with respect to where the electronic books may be used by the customer.

Interpretation Requested

You wish to know how the GST/HST applies to your client's supplies of books ordered and delivered electronically.

Interpretation Given

The supplies of books ordered and delivered electronically via the Internet are considered to be supplies of intangible personal property (IPP) for purposes of the Excise Tax Act ("the Act").

Pursuant to paragraph 142(1)(c) of the Act, a supply of IPP that is not related to real property, tangible personal property or a service, 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.

A supply of IPP can be deemed to be made in Canada even if it is not actually used in Canada. The fact that the supply may be made to a recipient who is outside Canada has no bearing on whether the supply is made in Canada. Where there are no restrictions as to where the IPP may be used, it will always be the case that the IPP may be used in Canada.

As the use of the electronic books is not restricted exclusively to "in Canada" or "outside Canada", the supplies of the electronic books are deemed to be made in Canada pursuant to subparagraph 142(1)(c)(i) of the Act since the books may be used in Canada. A taxable (other than a zero-rated) supply of property or a service made in Canada is subject to the GST/HST at the rate of 7% or 15% if the supply is made in a participating province (The three participating provinces are Nova Scotia, New Brunswick and Newfoundland and Labrador.). A supply that is zero-rated is taxable at the rate of 0%.

There are no provisions that would zero-rate the supplies of electronic books when supplied to non-resident persons. As such, the supplies of the books will be subject to GST at 7% when supplied to persons who are non-residents of Canada.

Since the supplies of the electronic books are made in Canada and are not zero-rated, a further analysis with respect to the province in which the supplies are made is necessary to determine the appropriate rate of GST/HST.

As the supplies of the electronic books are IPP that is not related to real property, tangible personal property or services and there are no restrictions regarding the province or group of provinces in which the IPP may be used, subparagraph 2(d)(ii) of Part III of Schedule IX to the Act must be examined to determine the place of supply. Under this provision, a supply of IPP will be considered to made in a province if the place of negotiation of the supply is in the province and the IPP may be used (i.e., is allowed to be used) otherwise than exclusively (90% or more) outside the province. Since there are no restrictions regarding the province in which the books may be used, it will always be the case that the books may be used otherwise than exclusively outside the province where the place of negotiation occurs. Section 1 of Part I of Schedule IX to the Act defines the "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, or to which that individual ordinarily reports, in the performance of the individual's duties in relation to the activities of the supplier in the course of which the supply is made ...".

Based on the information provided and the fact that the supplier's permanent establishment is in XXXXX it appears that the place of negotiation of the supply is in XXXXX. As the place of negotiation of the supplies of the electronic books is in XXXXX, subparagraph 2(d)(ii) of Part III of Schedule IX to the Act deems the supplies of the electronic books to be made in that province and, therefore, subject to the GST at the rate of 7% even if a recipient is located in a participating province.

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 Canada Customs and Revenue Agency 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) 954-7931.

Yours truly,

Anne Kratz
Electronic Commerce Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate