Cloud Computing Creates Stormy Weather in British Columbia

More and more companies are moving to cloud computing services for their information technology needs, although there seems to be some confusion about what “cloud computing” means—at least for sales tax purposes. Cloud computing commonly refers to the processing of customer data over the internet in the form of services, such as server use, storage, database access, and the provision of software, by a supplier. Because of the increased use of this technology, it is imperative for businesseso understand the application of Provincial Sales Tax (PST) to cloud computing and software-related support services. Unfortunately, provinces and taxpayers do not always agree on what constitutes a taxable supply when it comes to technology, as illustrated by a recent court case in British Columbia.

The Case

The Supreme Court of British Columbia (BCSC) decision in Hootsuite Inc. v. British Columbia (Finance),¹ in which the taxpayer’s appeal of a British Columbia Ministry of Finance PST assessment was allowed, had the potential to significantly change how software is taxed in the province. When reintroducing its PST, British Columbia specifically identified software as a taxable supply in the province, including a software program or the right to use a software program, whether delivered or accessed by any means.

Hootsuite Inc. (“Hootsuite”), a Canadian company focused on the development and maintenance of a social media management tool, appealed the Ministry’s determination that cloud computing products constitute software programs intended for use on a computer in British Columbia and are, therefore, subject to PST. Specifically, Hootsuite used Amazon Web Services (AWS) to host its social media management tool. 

In its findings, the BCSC distinguished between the terms “software” and “software programs.” Software is a set of programs, procedures, and data that enables a computer to perform certain tasks. Software programs, on the other hand, are individual sets of instructions designed to perform specific functions or tasks. Based on this distinction, the BCSC concluded that cloud computing services consist of opaque software, meaning that users cannot interact with the software to produce output.

There are two main types of cloud computing, and the distinction between them was also important to this case. The BCSC defined these types as follows:

a) Software as a service [SaaS], this is when cloud providers offer built-in application software for their users. Some of the applications are only available through the internet and some are available offline but store data on the cloud. These are the public-facing applications […]; and

b) Infrastructure as a service (IaaS). This is when the cloud providers offer access to computational services such as CPUs and storage through virtual machines on an on-demand basis. EC2 and S3 fall within this category of cloud computing services. The AWS user guide clearly states that EC2 provides computing capacity that can scale with the objective of eliminating the need for users to invest in hardware upfront.

The BCSC concluded that PST did not apply to certain cloud computing services, including IaaS, on the basis that these services do not qualify as software, as they remain opaque to users and limit user interaction (i.e., public applications).

Based on this decision, it appeared that buyers of cloud computing services in British Columbia needed to assess the fundamental nature of the services acquired. If the software used was merely incidental to the services purchased (e.g., technical expertise), this suggested that the transaction may not relate to the purchase of software and could be exempt from PST.

In Hootsuite’s case, the BCSC found that certain AWS supplies were not taxable because the fundamental nature of the services related to technical expertise or the supply of a virtual machine, rather than the acquisition of a software program or telecommunication service. It also ruled that any software or telecommunication services that formed part of the non-taxable technical support services were incidental to that supply.

British Columbia’s Response

The BCSC’s decision was not appreciated by the Ministry, which is responsible for creating, amending, repealing, and administering the British Columbia PST legislation. After reviewing the decision and its potential implications for the application of PST to remote access to software, cloud computing services, online support, and other related services, the province decided to amend the Provincial Sales Tax Act as part of its 2024 budget. In addition, it updated Provincial Sales Tax (PST) Bulletins PST 105, “Software,” and PST 107, “Telecommunication Services,” to provide guidance on the impact of these changes.

The application of the amendments is retroactive to April 1, 2013, and organizations that may have relied on the BCSC decision in Hootsuite’s case to determine the tax status of their digital products and cloud computing services should review these changes to understand the potential sales tax impact on those supplies.

As explained in a revised version of PST Bulletin PST 105, the new definition of software includes:

• Software or the right to use software that is delivered or accessed by any means
• Software as a Service (SaaS), which includes software or the right to use software when possession of the software is maintained by the software provider or another person (e.g., a third-party service provider) who is not the purchaser of the software
• Infrastructure as a Service (IaaS), which includes access to computational services or the right to access computational services, including computing or processing capacity and electronic storage
• Coded instructions or a right to use coded instructions designed to cause an electronic device to perform a task
• Application programming interfaces (APIs)
• A right under an optional software maintenance agreement to receive software updates if they become available

The new definition resulting from the amendments will ensure that a wider range of digital products and services is subject to PST, regardless of how they are used or accessed by users. In fact, most software accessed on, through, or with a device located in British Columbia will be subject to PST. For instance, the application of PST to the types of supplies acquired by Hootsuite is specifically addressed in Example 3 of the revised bulletin.

In addition, the Ministry has clarified that support services, including a non-incidental right to use software or a telecommunications service—such as SaaS, remote storage, and computing capacity—are considered taxable in whole or in part.

Furthermore, when an organization conducts business in British Columbia and purchases software for use in multiple jurisdictions, it may be required to pay PST on a prorated basis for its use in the province, regardless of whether the software was purchased in or outside British Columbia. To calculate the proportion of use in British Columbia, an organization has several methodologies available, provided the selected method is fair and reasonable.

What About Manitoba and Saskatchewan?

Manitoba and Saskatchewan also administer PST, making it important to understand how these two provinces tax software and cloud computing services.

In Manitoba, software is taxed as tangible personal property, and all software is taxable unless specifically exempted. For remote access to software residing on a server outside of Manitoba, the software must be downloaded to a computer within the province to be subject to PST. Therefore, it is critical to know whether users will download the remote software to their desktop or laptop when utilizing it to determine its tax status. However, custom software designed and developed solely for the use of one specific person is generally not subject to PST.

In Saskatchewan, software is considered a taxable service. Saskatchewan Information Bulletin PST-07, “Computer Hardware, Software and Computer Services,” provides an extensive list of taxable computer services. For software accessed remotely, PST applies regardless of whether the software is downloaded to a computer in the province. The bulletin has recently been updated to define cloud computing services and clarify that these services are taxable. The guidance also indicates that both resident and non-resident providers of SaaS, Platform as a Service (PaaS), and IaaS solutions must collect PST on these services when sold for consumption or use in, or in connection with, the province.

Conclusion

Once the storm clouds cleared in British Columbia following the Hootsuite decision, the definition of software was broadened to ensure PST applies to a wider range of software-related goods and services, including cloud computing services. Saskatchewan holds a similar position regarding remote access to software; however, to date, Manitoba has resisted expanding the scope of its PST to encompass all cloud computing services.

Consequently, it is of the utmost importance for purchasers and suppliers of software products and services, including cloud computing services, in British Columbia and Saskatchewan to validate the PST status of their information technology transactions to ensure they are correctly satisfying their tax obligations.

Ndoumbe Sow
Senior Tax Advisor, Client Support Services
ndoumbe.sow@ryan.com

¹ Hootsuite Inc. v. British Columbia (Finance), 2023 BCSC 358 (CanLII).