Retail Sales Tax on Downloaded Software

After getting the corporate name change finalized to Red Tempo Software Inc. from a numbered company, I finally got around to calling Ontario Revenue to get a vendor number for Ontario Provincial Sales Tax. As consumers in Ontario we know this as the dreaded PST (currently 8%) but to Ontario Revenue it’s known as RST (Retail Sales Tax) and that’s also how it’s shown in the documentation.

I called up their 1-800 number to register for my vendor number. I’m not sure at what point everyone went to voice commanded phone systems around here but I find they are even more annoying than the ‘mash finger on 1 for English’ kind. By the time I got to the 7th prompt it responded kindly to my monosyllabic grunt and sent me to a live person.

The conversation went like this:

• Gov: Hello, how can I help you?
• Me: I’m starting a new corporation and I’d like to get a vendor permit for RST
• Gov: What types of items are you selling?
• Me: I’m selling retail software
• Gov: Do you ship physical media like CD’s or DVD’s or do the customers download it electronically?
• Me: Just electronically
• Gov: Ok, you don’t have to charge them RST and you won’t need a vendor number. Thanks, and have a good day.

Wow! I thought. That was quick and to the point and now I don’t have to worry about the extra paper work or added cost to the customer. I quickly logged onto my site and removed the 8% for Ontario residents and looked to see if I’d charged anyone unnecessarily. A quick report showed that I had two sales to Ontario customers in November so I did a quick refund with a note and it was done.

On the weekend I started thinking this whole scenario over and wondered how an RST audit would go over when I told them I called and the lady told me that I didn’t have to charge RST. I thought I might need some documentation to back this up so I went looking online. I found the Computer Programs and Related Services guide on the Ontario Revenue site which I’d missed finding before. I quickly scanned down the document and found the following blurb.

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.

Well now. That doesn’t sound like the information the helpful government employee gave me over the phone. I decided I better call again to make sure the civil servant wasn’t just on a Timmies high when I called earlier. This time I got a different employee and I made my case again. She quickly tells me the exact same information that the first one did. Unbelievable! This time I’m not going to let it go at a simple verbal promise so I asked her about the guide I found earlier, “What about RST Guide 650″ I say. She has no idea what that guide is so I tell her the guide title and where I found it and she takes a look. At this point I can hear her reading the guide quickly and she finds the same blurb I mentioned above. It looks like you’ll have to charge RST after all she says. So after all this I finally got my vendor number. In closing she also mentioned to me that I might want to get a formal decision done and mailed to me so I have something to show if an audit comes knocking. I’m not sure why I’d need a formal decision document if I’m actually collecting tax for them though.

It makes me wonder how many online software companies in Ontario are incorrectly leaving off RST because of some errant advice over the phone.

Do you run an Ontario based software company? What’s your experience with RST and GST on downloadable software?