Fasken successfully represents Hootsuite Inc. (“Hootsuite”) in an appeal from an assessment of provincial sales tax on the purchase of “cloud computing” services. The decision has wide-ranging implications for industry, and is the first to consider the definition of “software program” under the modern Provincial Sales Tax Act, S.B.C. 2012, c. 35.
Hootsuite, like many other companies, purchases and utilizes cloud computing services to provide services to its customers. The services in question here utilize third party infrastructure based in the United States of America. Hootsuite relies on this scalable computing and storage capacity to host, develop, and operate its social media platform for its millions of users worldwide, 24 hours a day, seven days a week.
In the underlying tax assessment, the Minister of Finance concluded that the products and services involved either the purchase of software or telecommunication services, and were therefore taxable under ss. 105(1) or 130(1) of the Provincial Sales Tax Act. The Minister considered cloud computing to be taxable as software since Hootsuite accessed remote hardware (computing capacity and storage, respectively) virtually through a “stack of software”. Technical support services were also considered to be taxable as software and telecommunication services due the availability of an online chat feature as a means by which Hootsuite could access support, in addition to the more traditional means of a telephone support line and e-mail address to obtain technical support.
“Software” in the most general sense, is ubiquitous, and is an inherent component of most products or services consumed today. The Province’s position posed significant implications for industry and consumers generally – taken to its logical conclusion, it could mean that the purchase of groceries through an online delivery service is taxable as software or telecommunications (rather than an exempt purchase). It could also mean that withdrawing cash from an ATM would attract tax, as a customer of cloud computing providers “use” the essential, incidental, and integral software the service provider owns to provide cloud computing services in the same way that a customer “uses” a bank’s software when accessing his or her bank account through an ATM. The customer does not access the software directly. It exists on the bank’s side, like the software used to deliver cloud computing services.
Justice Thomas, sitting on appeal from the Minister’s decision, found for Hootsuite in all respects and set aside the tax assessment in its entirety.
Justice Thomas described the historical roots of modern day computing, noting that “cloud computing is a further evolution where the hardware providing the computational power and storage necessary to run applications are no longer located behind a company’s firewall but exist virtually in the cloud”. This allows users to “rent” a shared pool of computing infrastructure on demand instead of having to purchase those resources for themselves. The court explained that cloud computing services are provided along a spectrum, two broad types of which include “software as a service” and “infrastructure as a service”. The former is comprised of built in application software like word processors or database management tools, whereas the latter involves the provision of on-demand access to computational services such as CPUs and storage through virtual machines.
While the Court accepted that the products in question included software to some degree, this “is true for almost every purchase of electronic goods and services ranging from a refrigerator or an automobile or telehealth”. The Court found this was insufficient to properly attract taxation under the Act, as the fundamental nature of Hoosuite’s purchase was not the acquisition or use of a “software program”. Drawing on the legislative history of the Act and the dramatic expansion of software into modern day products and services, the court accepted there must be a distinction drawn between mere “software” and a “software program” for the purposes of the Provincial Sales Tax Act. It is only a “software program” which is subject to tax, being a product which is an “application”; that is, the user must be able to interact with the software and create an output based in part on those interactions with the program.
Justice Thomas found that the fundamental nature of the products purchased by Hootsuite is to provide on-demand computer infrastructure services, which is not subject to taxation under the Provincial Sales Tax Act as a “software program”. The court recognized that this might not necessarily be true of all cloud computing services since “there is no one way to characterize” them. This may lead to further litigation in the future, for other services consumed in the modern economy.
The court also applied a modern and common sense approach to the definition of telecommunication services. While acknowledging that the technical support services provided include the provision of a telecommunication service through a chat feature, such service was merely incidental to the fundamental nature of the transaction: the purchase of technical expertise. That expertise could be drawn upon in a number of ways, and “chat” was just one of them. As the service provider did not charge separately for this feature, the transaction as a whole was exempt from the definition of “sale” in the Act.
The court’s decision has wide-ranging significance. It is the first decision under the modern Provincial Sales Tax Act regime to consider the definition of “software program” generally, and ‘cloud computing’ specifically for the purposes of attracting taxation under the Act. Had the Court accepted a broader meaning of that term, the administrative and financial consequences would have been far reaching for businesses and everyday consumers alike given the ubiquitous nature of software, and the obligations imposed on purchasers to self assess and remit taxes.
The use of such products for the practical, scalable solutions they offer to businesses has grown exponentially in recent years and is anticipated to continue to grow. Clarity with respect to their taxation status in British Columbia is welcomed.
Fasken represented Hootsuite with a team led by Gavin Cameron and Oliver Verenca (Litigation and Dispute Resolution) and Michael Coburn (Tax).
- British Columbia