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Charging PST on labour services
Expert: Fred Watkin
We are an IT Service Oriented business and have been in business now for 6+ years. When we first opened we asked an Ontario PST agent in the Ottawa office if there was PST on labour, we were told that there was no PST on straight labour. We recently had a PST audit done and were told that we were suppose to collect PST on labour services. Can you clarify are we or aren't we supposed to charge PST on labour and if so what can we expect from the audit.
Fred Watkin answered:
For RST purposes, applications created using programming languages, where the source code is compiled into an executable format or into an intermediate language, are computer programs. Applications developed using languages other than programming languages, that are not compiled into executable format or an intermediate language, do not qualify as computer programs and are not subject to RST. Developing these types of applications is the provision of a non-taxable service.
All computer programs are taxable, unless the program qualifies as a custom computer program. The method of delivering a program (e.g., via CD, memory devices, electronic transmission, etc.) does not determine the RST status of the program, since computer programs are defined as tangible personal property (TPP) in the Retail Sales Tax Act.
RST applies to the sale of a taxable computer program, which includes leases, licensing agreements, or 'right to use' arrangements, even if there is no formal agreement. Any charges for additional licenses are also taxable.
The location of a computer program determines whether RST applies to the use of the program or to any related taxable service(s). RST applies to charges for the right to use (i.e., license agreement) a taxable computer program installed on a computer or server located in Ontario, regardless of the location of the person(s) using the program. For example, if a taxable computer program is installed on a computer or server located in Ontario, and users can access the computer program from remote locations inside and outside Ontario, RST applies to any charges for the use of the program. If a taxable computer program is installed on a computer or server located outside Ontario, and users can access the computer program from remote locations inside or outside Ontario, but cannot download the program, RST does not apply to any charges for the use of program.
Note: A pre-written computer program is a pre-packaged program that may be purchased in a form that is ready for use without further modifications and includes a computer program that is designed and developed for the use of more than one person.
A computer program does not qualify as custom if: it is designed and developed for the use of more than one person (i.e., more than one legal entity), or the intent at the time of development is to resell the computer program to others (e.g., the developer retains the rights to the source code or the program), or the same core program is used to develop a program for each person, and only minor modifications are made to that program.
A purchase exemption certificate (PEC) is not required for the sale of a custom computer program.
As outlined earlier, not all custom computer programs are developed from scratch.
Modifications to a pre-written program may result in the creation of a custom program. The following conditions must be met in order for the program to qualify as a custom program: the price of the modifications exceed the price of the original pre-written program, and the modifications are performed solely to meet the specific requirements of one person (i.e., one legal entity), and the resulting computer program is for the exclusive use of that person.
Purchasers are required to provide a PEC when claiming an exemption for modifications performed separate from the sale of a program. Custom computer programs may include programs developed in-house by a company for its exclusive use, or pre-written computer programs that are modified extensively by staff in-house. Companies must maintain documentation to support that the programs qualify as custom computer programs.
Custom computer programs may only be sold exempt from RST to the first purchaser. RST applies to subsequent sales of the program. However, if the purchaser is acquiring the seller's ongoing business, with substantially all of the seller's business assets, the program remains a custom computer program. Services provided in respect of a custom computer program are exempt from RST. To claim the exemption, the purchaser must provide a valid PEC to the service provider.
'Taxable services' as related to computer programs are labour provided to install, configure, modify or upgrade a taxable computer program and any contract for the service, maintenance or warranty of a computer program.
RST applies to these taxable services, when they are performed in respect of a taxable computer program located in Ontario.
'Install' means to perform work required to load a computer program onto hardware in order to permit the users to set up or operate the computer program.
Installing a computer program may include a number of steps such as verifying the existence of prerequisite programs, unloading the program from the delivery medium to disk storage, etc. RST applies to the total process of installing, reinstalling or uninstalling a taxable computer program.
'Configure' means to perform work required to input customer-specific values and parameters into a computer program or hardware.
Configuring a program may involve choosing options and/or parameters, or inputting values into data fields or tables which will be created as part of the configuration process. Configuring a program does not change the source code of the program.
'Modify' means to change the source code of a computer program. Depending on the amount charged for the source code changes, modifications may convert a taxable program into a custom computer program.
'Upgrade' means to remedy problems within a computer program or between computer programs, or to provide an improvement to the computer program that is offered or available to all licensees of that computer program.
Upgrades include corrective services performed to resolve problems within a computer program or between computer programs. Upgrades can also be standardized enhancements to a computer program, such as new releases, patches, service packs, add-ons or fixes to the program. Some upgrades need to be manually coded into the existing source code of a program by a technician or programmer. Other upgrades may be provided in a ready-to-install format (i.e., executable format). While both types of upgrades are taxable, the ready-to-install format is a computer program and not a service.
'Service or maintenance of a computer program' means the installation, configuration, modification or upgrade of a computer program.
Service and maintenance agreements that include any taxable services (i.e., installation, configuration, modification or upgrades to a computer program) are subject to RST. 'Warranty of a computer program' means an undertaking that the computer program will function as required by the purchaser or as guaranteed by the producer or vendor.
Service providers must pay RST on all taxable goods and services purchased in order to provide their services.
About the author
Fred Watkin is a chartered accountant with a small boutique CA firm in Brampton. His firm does tax planning, business development, R&D, and compliance services for individuals and small to medium sized businesses in Ontario. The company website is www.watkinassociates.com