Changes to BC’s PSTA broadens tax on digital services

Executive summary

In 2023, a BC court decision narrowed the scope of the PSTA in relation to software. In response, the province retroactively amended the PSTA to broaden its application with respect to digital services. The terms "software" and "use" were expanded to include indirectly accessed software, specifically targeting cloud computing services. As the amendments are retroactive to 2013, this may lead to reassessment issues for both current and past purchasers of digital products in BC.

Earlier this year, British Columbia significantly broadened its definition of “software” under its Provincial Sales Tax Act (PSTA), a move that has the potential to capture a myriad of software services and products that had not previously been taxable. This legislative change was in response to the BC Supreme Court ruling in Hootsuite Inc. v. British Columbia^[1] (Hootsuite) where “software” was given a narrow definition, shielding some cloud computing services from BC’s Provincial Sales Tax (PST).

Hootsuite

Hootsuite is a social media management company that uses third-party cloud computing services, which it purchased from Amazon Web Services (AWS).

Hootsuite was assessed for not paying PST on various AWS services, including on the purchase of elastic compute cloud (“EC2”) and simple storage service (“S3”). EC2 and S3 each provide the user with a virtual machine: EC2 provides computing resources whereas S3 provides storage capacity. The assessment took the position that these two services allowed Hootsuite to remotely access hardware by the use of software, thereby characterizing EC2 and S3 as software purchases.

The PSTA imposes tax on the sale of software used on an electronic device, where that device is “ordinarily situated” in BC.^[2] “Software” is defined as the right to access or use a “software program”. However, no definition exists for “software program”, which opened the door for the court to clarify this ambiguity. The court ruled that EC2 and S3 are not software programs, and therefore do not attract PST.

The court began by stating that while all software programs are software, not all software is a software program. It narrowly defined “software program” as a software “application” whereby a user is able to interact directly with the software and create an output based in part on those interactions with the program. This involves directly accessing or manipulating the program. Where this manipulation is not possible, the software is considered “opaque” to the user and is therefore not a “software program”. An example would be using a bank’s ATM: The user is not able to go beyond the surface level of the interface to manipulate the software and produce an output. In Hootsuite, opacity became a crucial criterion in defining a software program, and therefore what is taxable.

As EC2 and S3 are cloud computing services, the court had to determine whether these services were taxable. The court broadly stated that some cloud computing products are taxable, whereas others are not. It further outlined that some cloud computing products fall within the category of Infrastructure as a Service (IaaS). Cloud computing products fall within IaaS if a cloud provider gives access to computation services through virtual machines. These can be either taxable or non-taxable. EC2 and S3 are IaaS cloud computing products, as they provide on-demand computer infrastructure services virtually. In this particular case, EC2 and S3 were deemed to be opaque to the user, so they were not software programs and therefore not taxable. Later legislative amendments would change this analysis.

2024 Legislative Amendments

In April 2024, the BC legislature passed Bill-3, overturning the opacity criterion in Hootsuite by redefining “software” and “use” in the PSTA, retroactive to April 1, 2013.

The new definition of “software” is inclusive and no longer makes reference to “software programs”. Instead of software being the right to use a software program, the new definition refers to the usage of any kind of software. New categories have also been added to the definition of software:

• Software as a Service (SaaS) that is delivered or accessed by any means
• IaaS
• An application programming interface
• Coded instructions created to cause an electronic device to perform a task

Bill-3 also provides a new definition of IaaS: IaaS includes “access to computational services … including computing or processing capacity and electronic storage”. As a result, the provision of mere computational services—such as EC2 and S3—would likely be considered software, making them taxable despite the fact that the underlying software remains opaque to the user. 

Another legislative change within Bill-3 is the broadening of the definition of “use”. Now, “use” includes situations where the user indirectly accesses software. As noted above, BC’s PST normally applies to software acquired for use on an electronic device, where that device is “ordinarily situated” in BC. The new definition of “use” retains part of the old definition by continuing to state that “use” includes the sending, receiving, viewing or accessing of software, including situations where possession is maintained by the software provider. Now added to the definition of “use” is:

1. The software may be maintained by a third-party who is neither the user nor the provider, and
2. The software may be accessed indirectly, including through other software or electronic devices.

The new, broader definition of “use” may result in the imposition of PST on services, for example, where a customer indirectly accesses on-demand computer resources, including cloud-based computing services. PST may therefore apply even in situations where the purchaser or user interacts indirectly with the software.

Considerations for Tech Companies

Due to a transitional provision in Bill-3, the amendments to definitions in the PSTA are subject to regulatory change until March 31, 2025. This creates ambiguity as to how the rules may change from April 2024 until the regulatory cutoff in March 2025.

In Information Notice 2023-005,^[3] the BC government considers the PSTA amendments to simply “support how the PST was administered” prior to Hootsuite, stating that the government had always considered that PST was applicable to cloud computing services. The Notice also outlines that amendments in Bill-3 will enhance certainty by “clarifying” how PST applies to various products, including cloud computing services.

Despite the government’s confidence that the amendments merely reiterate existing practices, both buyers and sellers should now be cautious when providing or using software products that may fall into the newly expanded definitions of “software” and “use”. Furthermore, as the amendments are backdated to April 1, 2013 and BC’s reassessment period is six years,^[4] purchasers of past digital services may find themselves liable for PST if their vendor had incorrectly omitted to levy the tax based on the broader, retroactive definitions of “software” and “use”.

[1] 2023 BCSC 358 (CanLii)

[2] See sections 105, 107 and 112 of the BC PSTA.

[3] BC PST Notice 2023-005, issued June 2023

[4] BC PSTA, section 234 – Time limit on prosecution