Industry seeks clarity on software tax

It’s been around for almost five years, but one of the big issues on the minds of Ontario IT professionals is an obscure retail sales tax on software installations.

In a survey of Toronto members of the Canadian Information Processing Society

(CIPS) conducted last fall, members indicated one of the issues they feel least informed about is the retail sales tax (RST) the Ontario government introduced in 1997. (Following the tax issue were concerns about viruses, employment, privacy and ethics.)

According to Pat Gaudet, section president of CIPS Toronto, many members are still unaware of how and when the tax is applied and the concern is that fines levied for failing to pay the tax could affect the survival of a small consultant firm or business. CIPS believes it could also boost the cost of software, which could affect the demand for new applications.

“We want members to be aware and it is not crystal clear when to apply the tax or not,” said Gaudet, noting a CIPS member is heading a group looking into the issue.

Gaudet said CIPS has heard anecdotally of a small company that was audited and forced out of business because of the size of the back payment demanded by the Ministry of Finance.

In 1997 the province introduced the application of RST on computer program installations and related services.

According to the Ontario government’s Ministry of Finance Web site, taxable services “include labour provided to install, assemble, repair or maintain taxable goods.”

And while a custom computer program is not taxable for RST purposes, computer programs that would be taxable include packaged, pre-written, “canned” or “off the shelf” programs and upgrades, system programs and operating systems. RST must be charged on the total selling price of the program, including any charges for installation and/or configurations.

When it comes to customizing pre-packaged software, if it is not a “substantial” customization it would be taxable. But if the price of the modification exceeds the price of the software being modified, it is considered a substantial modification and deemed non-taxable.

The RST Guide to Computer Programs and Related Services is an 11-page document that covers multiple scenarios, and is available online.

But contrary to claims from CIPS members that little is understood about the tax, Ernst & Young principal Charlie Eansor says industry knowledge of RST on installations should be well known by now.

“I”ve been trying to warn people about this forever,” said Eansor. “Anyone who has not been assessed does not want to believe this issue exists. A lot of people just stick their head in the sand and think some how it will pass them by.”

Eansor says the “level of surprise” is going down in the industry because the word is getting around about the tax.

“I would think at this point, virtually everyone in the business is probably aware of it, maybe not intimately, but anyone who claims they aren’t is not being entirely honest.”

In the beginning, few were aware of the new tax rule but then the government started cracking down on those who had failed to remit the tax, and in many cases, it was the purchaser, not the vendor, who ended up paying.

“Because of the gestation period of these things nothing came about until two or three years afterwards and all of a sudden the auditor started coming up with these huge dollar assessments and caught a lot of people by surprise because they simply didn’t know about it,” said Eansor.

Eansor says the RST branch of the government sends their mailings to people who are registered for retail sales tax and that’s how they typically inform the public about new regulations. But many small consulting businesses were unaware because they weren’t doing anything that was RST taxable before so they didn’t have to remit.

There are two ways the Ontario Ministry of Finance can assess the tax after the fact: They assess the purchaser for failing to pay tax on things they should have paid tax on, and they can assess a vendor for tax they should have collected. While typically both are not hit at the same time, the government can choose to get it from either end of the transaction.

“As a general rule, whoever they find first gets assessed first,” said Eansor.

For the most part though, Eansor says the Ministry of Finance is discovering the tax has been paid when auditing purchasers of software.

“When an audit is conducted they go through all the things people bought for their business and make sure they paid the tax on it and when it comes to any computer software items, they look pretty close at it and look at the installations.

“You can find it pretty easily because in accounting records people add it as an asset so its quite obvious to anyone looking that they’ve made additions to hardware or software systems and then they ask ‘How much tax did you pay on this stuff ? Then they take out invoices from the people who did the work and see there was no tax paid and so they assess the purchaser on it.”

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