The Effect of HST on Online Business

The following is very important for anybody who is selling products or services online, and is based in Ontario. I’m assuming that a similar situation also applies to companies in British Columbia, but I haven’t confirmed this.

On 1 July 2010, the HST (Harmonized Sales Tax) comes into effect in both provinces, replacing the separate federal GST and provincial PST sales taxes.

It turns out that the policy for anybody selling online is poorly documented right now, and further that there is still extensive disagreement within Revenue Canada regarding how to apply the HST under certain circumstances that are common online. I’ll do my best to provide as much detail as possible, based on what I’ve been able to find out so far.

A customer of mine recently spoke to a number of accountants (more than three) regarding how taxation should work when selling products (or services) online from Ontario. The answers were completely different in each of the responses he received, so he went to the source and spoke directly to Revenue Canada. The following rules apply according to what he learned there:

  1. HST applicability is now firmly based on the ship-to address of the customer. This was never entirely clear with the GST previously, and we usually recommended charging GST to customers if either the bill-to or ship-to addresses were in Ontario. The HST is based on the destination of where the goods are going to. Check for further details below, because this doesn’t necessarily simplify anything.
  2. For companies based in Ontario, selling to a customer based in Ontario, the HST must be charged on goods/services (we’re talking online stuff which in all likelyhood doesn’t fit into any of the large number of exempted goods) at 13%.
  3. NEW: (For items being shipped out of province) If the customer is based in other provinces in Canada, the taxes as applicable in that province must be billed. Previously, most vendors charged only GST to customers in other provinces. I will include a chart of the specific tax rates as of July 1st below. If the destination province is part of the HST schema, HST at THAT province’s rate is billed. Otherwise GST at 5% plus whatever provincial tax applies, is billed.
  4. Virtual items sold to customers in other provinces are a problem. The item isn’t being shipped outside of the province (it doesn’t actually exist in physical terms), so its likely that full Ontario HST of 13% needs to be charged.
  5. There is still no clear policy on how to address customers outside of Canada. This is a serious problem given the short time frame until the HST goes into effect. One of the multiple opinions we were given is to charge 0% HST (not the same as no tax – charging 0% HST allows you to claim various deductions afterwards apparently) for US-based customers. Another option was that we should be billing full 13% HST for all customers outside of Canada, which would have severe ramifications for Ontario-based online businesses. I will try to get a clarification on this – and will post an update here if possible.
  6. Its not clear if the US is treated differently than other countries, and whether it has to do specifically with tax treaties.
  7. It appears that HST is billed on top of shipping. That means you need to do a subtotal with shipping first, and then charge HST on top of that. I’ll try to get this clarified as well. I know that some shopping cart systems (i.e. OS Commerce) already allow for a variety of configurations with regards to whether tax is charged on the shipping line item of an order. Other carts may not have this flexibility, so may need to have coding done to support this.

As you can see from the above, doing business online from Ontario is about to become much more complex than before.

Given the short time until this takes effect, I’m perturbed by the lack of good information available on this topic.

The majority of what I’ve read on the HST was aimed solely at consumers.

What’s even worse is that it appears that many accountants have no idea at all how the HST works, and particularly with regards to e-commerce.

Compounding the problem is the lack of coherent policy in place with regards to how the HST will work across jurisdictions – this kind of thing may have worked out back in the day when only large businesses sold across borders, but today virtually all businesses with an online presence view the entire world as a potential customer. Not having proper policy in place for the HST is just not acceptable. Its a serious, serious problem for a very large number of companies, small and large, that operate in the modern world. This was poorly thought out, and poorly implemented.

The following is a listing of the tax rates for the different provinces of Canada, as of July 1st 2010. They may change periodically thereafter, so don’t use this as a definitive list.

Province Tax Rate (%) HST?
Ontario 13% Yes
British Columbia 12% Yes
Alberta 5% No
Saskatchewan 5% GST + 5% PST No
Manitoba 5% GST + 7% PST No
Quebec 5% GST + 7.5% PST QST
New Brunswick 13% Yes
Nova Scotia 15% Yes
Newfoundland 13% Yes
Prince Edward Island 5% GST + 10% PST No
Yukon 5% GST No
Nunavut 5% GST No
North West Territories 5% GST No

Update (29 June 2010):

I’ve received the following updates to the above info:

  • Billing from Ontario to other provinces – for non-HST provinces, it is only necessary to bill GST (not that province’s PST). This appears to include Quebec (i.e. not QST).
  • Shipping fees must have HST applied to them (i.ecreate your subtotal, add shipping, and then apply tax).
  • Virtual products must have HST applied to them, if the customer resides in Canada (regardless of where). This is because nothing is physically shipped to the customer.
  • US and international customers are not charged tax. Or maybe still charged 0% HST. I’m still not clear on this one.

7 responses on “The Effect of HST on Online Business

  1. Hawk20011

    Does software sales count as a virtual product and what if the sales are well under the $30,000 small business threshold?

  2. Jeremy

    When in doubt, I would say “ask Revenue Canada”.

    I think the general response is something like this:

    1. a piece of software that comes on a cd or dvd is a “real world product” regardless. So tax based on destination.

    2. software that can only be obtained by downloading off the internet MAY (again check with the powers that be) be a virtual product, for purposes of sales across provincial borders. So it MAY be that you need to tax based on your location.

    3. for small businesses under the limit (whatever it currently is), check with your accountant. In most cases this stuff is self-assessed anyhow.

    Disclaimer: I'm a software developer, not an accountant or taxation expert!

  3. Cpc

    After talking with Revenue Canada, the part about “Virtual Products” doesn’t sound accurate.nnThey are referred to as “Intangible Goods”, and here are a couple scenarios I learned.nn1) If you are a company in Ontario, and you build a website for a client in Ontario, then you must charge the full 13% HST. However, if you’re building a website for a client in, say Alberta, then you would only charge 5% GST (I believe you’d label it as GST, not HST too on the invoice). If it was to BC, then you’d charge 12% HST. If Nova Scotia, then 15% HST, etc.nn2) If you’re an Ontario-based company selling online advertising, it’s the same thing as well. You’d charge only 5% in Alberta or 12% in BC.nnWebsites and advertising are intangible goods and while nothing is physically shipped, their primary usage is for someone else in a different province, so you take on their tax rates instead.

  4. Jeremy

    That sounds reasonable. The problem is dealing with things like online currencies (i.e. you buy “Credits” on a website), where it is very uncertain exactly where the benefit of its “use” is. A website is at least somewhat tangible in the sense that you could put the files onto a cd and hand it to somebody.

  5. Mccaffrey

    If a company based in the United States but is selling services through north America. The service is online virtual service suscription based.nnAre taxes required to be payed in different locations. Ie Ontario hst

    1. Anonymous

      I don’t claim to be an expert in this, but I don’t think a company without a physical presence in Canada be required to collect Canadian taxes, even if selling to a Canadian. If the company has an actual Canadian presence, then they should definitely ask their accountant, or talk directly to the Canada Revenue Agency (CRA).nnThe recent fighting between Amazon.com and various US States may eventually change how jurisdictions are viewed across North America. Even in Amazon’s case though, I think they’re mainly being forced to collect sales taxes for states where they have actual physical resources (i.e. warehouses or offices).

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