The application of British Columbia’s provincial sales tax (BC PST) to digital services has sparked controversy and raised questions about how these services should be taxed. One of the main issues at hand is whether these services should be classified as “software”. Fortunately, the British Columbia Supreme Court has shed some light on this matter in a recent case, Hootsuite Inc. v British Columbia (Finance), 2023 BCSC 358 (referred to as “Hootsuite”). This decision provides valuable guidance in determining what exactly constitutes “software”.
In the Hootsuite case, the court was tasked with determining whether the digital services provided by Hootsuite Inc., a social media management platform, should be subject to BC PST. The court’s decision hinged on the interpretation of the term “software” as defined in the relevant legislation.
The court noted that the definition of “software” in the legislation was broad and encompassed a wide range of digital services. However, the court emphasized that not all digital services would fall within the definition of “software” for the purpose of BC PST. Instead, the court adopted a more nuanced approach, focusing on the substance and nature of the services provided.
According to the court, the key factor in determining whether a digital service should be classified as “software” is the degree of user control and customization. In other words, if the service allows users to manipulate and customize the underlying software to meet their specific needs, it would likely be considered “software” for the purpose of BC PST. On the other hand, if the service is more akin to a traditional service, where users do not have the ability to customize the software, it would not be classified as “software” and would not be subject to BC PST.
This distinction is significant because the tax treatment of digital services can have a significant impact on businesses operating in the digital economy. If a service is classified as “software” and subject to BC PST, businesses would need to account for this tax in their pricing and financial planning. On the other hand, if a service is not considered “software”, businesses would not be required to collect and remit BC PST on these services.
The court’s decision in Hootsuite provides much-needed clarity for businesses operating in the digital space. It allows them to better understand their tax obligations and ensures a more consistent and fair application of BC PST to digital services.
However, it is worth noting that the court’s decision in Hootsuite is specific to the interpretation of BC PST legislation and may not have a direct impact on the tax treatment of digital services in other jurisdictions. Each jurisdiction may have its own definitions and interpretations of what constitutes “software” for tax purposes.
In conclusion, the British Columbia Supreme Court’s decision in Hootsuite has provided valuable guidance in determining the tax treatment of digital services for the purpose of BC PST. The court’s focus on user control and customization as the key factors in classifying a service as “software” ensures a more nuanced and fair approach to taxing digital services. Businesses operating in the digital economy can now have a clearer understanding of their tax obligations and can plan accordingly. However, it is important to note that this decision is specific to British Columbia and may not have a direct impact on the tax treatment of digital services in other jurisdictions.
