Taxing Online Purchases and Sales

These days tax jurisdictions are struggling to deal with online transactions. In British Columbia we are subject to both Federal GST and BC PST. If the jurisdictions themselves are struggling, that means that small businesses may find that they are caught up in a dizzying array of complex rules for multiple jurisdictions. By and large it is likely that most small CCPCs (Canadian-controlled private corporations) are flying blind.

While government tax authorities can be saddled with complex tax laws to administer, they often aren’t adequately resourced to ensure compliance. In the case of the Federal government and the Goods & Services Tax, they hire people straight out of school with no accounting training or experience. Even the supervisors typically learn on the job without the benefit of the discipline that comes from having to justify their time to clients and actually collect fees in a competitive environment.

For their part smaller CPA firms focus on basic compliance for both PST and GST. Unlike the tax authorities, CPAs in practice do work in a competitive environment.

Their clients won’t thank them for doing a “deep dive’ into PST and / or GST issues and uncovering additional tax liabilities. Particularly when they charge more than competing firms that don’t bother.

PLACE OF SUPPLY RULES for GST

While I’m not a sales tax (aka “indirect tax”) specialist, I had to bring in a specialist when one of my clients had a bit of a home run in the first month of a new product launch. The issue surrounded the “place of supply rules” for GST. While the issue is too complex to discuss here, we needed to establish where their online customers resided and whether or not they were GST registrants.

If we were unable to document that, the tax authority would have been in a position to assess 15% GST on all online sales. This, in spite of the fact that 95% or more of the customers were non-residents and shouldn’t have been subject to GST. Luckily the specialist was able to keep us out of that minefield.

SELF-ASSESSING PST for ONLINE PURCHASES

For startups (and anyone else for that matter) purchasing online services from other jurisdictions, there is a requirement to self-assess PST on the taxable portion of those services. Most of us simply pay for online services as billed. We don’t question whether the vendor properly excluded BC PST from the invoice.

However consider that most SAAS (software as a service) companies are located in other jurisdictions and know even less about BC PST regulations than we do here. If the service is taxable – and some are – our local startup would be required to self-assess and remit tax on the purchase.

Currently GOOGLE is billing me $12.50 a month for 3 users of email services. I must confess that I am not convinced that these services aren’t subject to PST. However I’m not being charged and haven’t done a deep dive into local PST legislation to determine whether I should self-assess. Since the PST for a year would only be about $10.50, I felt that it didn’t warrant the research time.

If the exposure is fairly small, it may be practical to simply wait for the Ministry to assess. In its wisdom the government’s new PST legislation doesn’t allow for the taxation of transactions that occur more than four years before they were eventually identified by the director (Section 200 of the Provincial Sales Tax Act).

Unless of course the omission was significant and intentional.

SELF-ASSESSING PST on FOREIGN LEGAL FEES

There is also some risk that legal fees in the US relating to investments by a venture capital firm may actually be subject to BC PST. Since we’re not in that position yet, we haven’t looked too closely at the legislation.

TAX ISSUES IN SELLING TO FOREIGN JURISDICTIONS

While I’m not a US or cross-border tax specialist, I have been told that companies selling into California for instance, may be exposed to income taxes in the State of California, at some level of penetration. While Canada has tax treaties with most countries that Canadians export to, it should be noted that these typically cover federal income tax only. States and provinces may have other filing and tax requirements.

Clearly companies that deal routinely across borders should seek advice from CPAs with relevant experience.

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