Provincial Sales Tax Exemption & Refund Regulation, Part 3 - Exemptions in Relation to Software

Division 1 — Exemptions in Relation to Software

Section 64 – Software Obtained By Qualifying School, School Board Or Similar Authority

PSTERR - SEC.64/Int.

References:

Act: Section 1 "software", "substantially", "use"; Part 4; Section 109; Section 145

PSTERR: Section 1 "obtain", "qualifying school"

Bulletin PST 105

Interpretation (Issued: 2014/02)

Effective October 25, 2013, OIC 441/2013 amended PSTERR section 64 by adding PSTERR subsection 64(3). This provides authority for a collector to require, from a qualifying school, school board or similar authority, a detailed list or purchase order that clearly indicates the specified software is obtained for use substantially as a teaching aid for students, as supporting documentation for that purchaser to claim an exemption from tax under PSTERR subsection 64(1).

Effective April 1, 2013, B.C. Reg. 97/2013 provides under PSTERR section 64 an exemption from tax for specified Part 4 software obtained by a qualifying school, school board or similar authority for use substantially as a teaching aid for students.

Subsection 64(1) provides that subject to PSTERR subsection 64(2), software is exempt from tax imposed under Part 4 [Taxes in Relation to Software] of the Act, other than section 109 [tax if use of software changes], if the software is obtained by a qualifying school, school board or similar authority for use substantially as a teaching aid for students.

Subsection 64(2) provides that the exemption under PSTERR subsection 64(1) does not apply to software obtained for use by teachers to assess or evaluate students or to report on students' progress.

Subsection 64(3) provides that PSTERR subsection 64(1) is prescribed for the purposes of paragraph 145(1)(b) [provisions providing exemptions in relation to software] of the Act.

Section 65 – New Resident’s Effects – Software

PSTERR - SEC.65/Int.

References:

Act: Section 1 "Excise Tax Act", "software", "use"; Section 106; Section 109

Bulletin PST 105

Interpretation (Issued: 2014/02)

Effective April 1, 2013, B.C. Reg. 97/2013 provides under PSTERR section 65 an exemption from tax for software purchased by an individual at least 30 days before the individual became a resident of British Columbia in the specified circumstances.

Subsection 65(1) provides that software is exempt from tax imposed under section 106 [tax on use of software on device in British Columbia] of the Act if the software was purchased by an individual

(a) for use solely for a non-business purpose, and

(b) at least 30 days before the individual became a resident of British Columbia.

Subsection 65(2) provides that software that qualified for an exemption under PSTERR subsection 65(1) on the date on which the software was first used in British Columbia and that is subsequently used for a business purpose is exempt from tax imposed under section 109 [tax if use of software changes] of the Act if

(a) the use of the software for a business purpose does not begin within the first 6 months after the individual referred to in PSTERR subsection 65(1) became a resident of British Columbia,

(b) the software was owned and used by that individual for more than 3 years before that individual became a resident of British Columbia, and

(c) the individual referred to in PSTERR subsection 65(1)

(i) previously paid tax under the Act or the Social Service Tax Act in respect of the software and has not obtained and is not entitled to obtain, under those Acts, a refund of that tax,

(ii) previously paid tax under section 165(2), 212.1 or 218.1 or Division IV.1 of Part IX of the Excise Tax Act in respect of the software and has not obtained and is not entitled to obtain, under Part IX of that Act, a refund of or a credit or rebate for that tax, or

(iii) previously paid sales tax in respect of the software to another province and has not obtained and is not entitled to obtain a refund of or a credit or rebate for that sales tax.

Section 66 – Commercial Fishers

PSTERR - SEC.66/Int.

References:

Act: Section 1 "collector", "director", "software", "use"; Part 4; Section 109; Section 145

PSTERR: Section 1 "obtain", "qualifying commercial fisher"; Schedule 3

Bulletin PST 105

Interpretation (Issued: 2014/02)

Effective April 1, 2013, B.C. Reg. 97/2013 provides under PSTERR section 66 an exemption from tax for specified software obtained by a qualifying commercial fisher for use on electronic monitoring equipment designed for use for monitoring fishing activities.

Subsection 66(1) provides that software designed for use on electronic monitoring equipment described in item 22 of PSTERR Schedule 3 [Fishing Equipment for Commercial Fishing Purpose] is exempt from tax imposed under Part 4 [Taxes in Relation to Software] of the Act, other than section 109 [tax if use of software changes], if

(a) the software is obtained by a qualifying commercial fisher for use on electronic monitoring equipment described in item 22 of Schedule 3, and

(b) the electronic monitoring equipment is to be used by a qualifying commercial fisher solely for a commercial fishing purpose.

Subsection 66(2) provides that PSTERR subsection 66(1) is prescribed for the purposes of paragraph 145(1)(b) [provisions providing exemptions in relation to software] of the Act.

Subsection 66(3) provides that for the purposes of paragraph 145(1.1)(a) [evidence required to claim certain exemptions in relation to tangible personal property or software] of the Act, in relation to a person who alleges that software is exempt under PSTERR subsection 66(1), the collector is required to obtain a declaration in a form acceptable to the director (a Certificate of Exemption – Commercial Fisher (form FIN 455)).

Section 67 – Transfer Due To Dissolution Of Marriage Or Relationship

PSTERR - SEC.67/Int.

References:

Act: Section 1 "software"; Part 4

Bulletin PST 105

Interpretation (Issued: 2014/02)

Effective April 1, 2013, B.C. Reg. 97/2013 provides under PSTERR section 67 that an individual is exempt from tax imposed under Part 4 [Taxes in Relation to Software] of the Act in respect of software transferred to the individual from a spouse or former spouse of the individual under

(a) an agreement dividing property under Part 5 [Property Division] or Part 6 [Pension Division] of the Family Law Act,

(a) a written separation agreement, or a marriage agreement, referred to in the Family Relations Act, or

(b) an order of a court on the dissolution of a marriage or marriage-like relationship.

Section 68 – Custom Software, Custom Modified Software And Other Software

PSTERR - SEC.68/Int.-R.7

References:

Act: Section 1 "lessee", "lease price", "purchase price", "purchaser", "sale", "software", "use"; Part 4; Section 109; Section 112

PSTERR: Section 1 "obtain"; Section 59

Bulletin PST 105

Interpretation (Issued: 2014/02; Revised: 2014/07)

Effective April 1, 2013, B.C. Reg. 97/2013 provides under PSTERR section 68 an exemption from tax for custom software, custom modified software and other specified Part 4 software, in certain circumstances.

Subsection 68(1) provides that in PSTERR section 68:

"custom modified software" means software that is modified

(a) in a manner that involves changes to the source code, and

(b) solely to meet the requirements of a specific person

if

(c) the purchase price is for the software as modified, and

(d) that purchase price is greater than double what it would be for the software in its unmodified form;

"custom software" means

(a) software that is developed solely to meet the requirements of a specific person, and

(b) modifications to software referred to in PSTERR paragraph 68(1)(a), if the modifications are performed for that specific person.

Subsection 68(2) provides that custom software or custom modified software is exempt from tax imposed under Part 4 [Taxes in Relation to Software] of the Act, other than section 109 [tax if use of software changes], if the custom software or custom modified software is obtained by, or on behalf of, the specific person referred to in the definition of "custom software" or "custom modified software", as applicable, in PSTERR subsection 68(1), for that specific person's own use.

Subsection 68(3) provides that custom software or custom modified software is exempt from tax imposed under Part 4 of the Act if the custom software or custom modified software is sold, as part of a business sold as a going concern, by a person who retains no rights or interests in the custom software or custom modified software.

Subsection 68(4) provides that software is exempt from tax imposed under Part 4 of the Act if

(a) the software is sold, as part of a business sold as a going concern, by a person who retains no rights or interests in the software,

(b) before the sale referred to in PSTERR paragraph 68(4)(a), the software was modified

(i) in a manner that involved changes to the source code, and

(ii) solely to meet the requirements of a specific person, and

(c) the purchase price or lease price, as the case may be, of the modifications referred to in PSTERR paragraph 68(4)(b) was

(i) segregated on the receipt, bill or invoice provided to the purchaser or lessee, and

(ii) greater than the purchase price or lease price, as the case may be, of the software in its unmodified form.

Subsection 68(5) provides that software source code in non-executable form is exempt from tax imposed under Part 4 of the Act.

Subsection 68(6) provides that PSTERR subsections 68(3) and 68(4) are prescribed for the purposes of subsection 112(2) [tax on purchase of software by small seller] of the Act.

R.1 Software Modules (Issued: 2014/07)

Software is often sold in packages consisting of modules. One or more module composes the software application. Within the overall software application, each module is designed to carry on a specific type of functionality. For example, accounting and inventory control software is often sold in separate modules for general ledger, accounts payable, accounts receivable, and inventory tracking.

To work together, the modules generally use an interface program. However, in some situations a module is capable of being run as a stand-alone program.

Sometimes the modules are sold separately. In other situations, the modules are sold as part of an entire package. In such cases, the purchaser may have access to the entire group of modules or they may only have access to a limited number.

Packages that do not contain custom software or custom modified software

If a software package consists solely of pre-written modules and pre-written interface programs, then the entire purchase price is taxable.

Packages that contain custom software

If a separate custom software program is written to allow the pre-written modules to operate together, but the modules themselves are not modified, then tax applies as follows.

• If there is a separate charge for the custom software, tax applies only to the price for the pre-written modules but not to the separate charge for the custom software program (assuming all conditions for the custom software exemption are met with respect to the interface program).

• If there is a single charge for the pre-written modules and the custom interface program, then PST applies based on the bundled sales rules. For additional information on bundled sales see PSTA/SEC.26/Int.

Packages that contain custom modified software

If one or more modules are custom-modified for a particular customer, the purchase price for the unmodified software is the total purchase price for all of the modules that make up the package purchased by the customer.

If the customer purchases a pre-written software package and, as a condition of the agreement, has custom modifications made to several modules, the charge for the modified software package is exempt if it is more than double what the price for the unmodified software package would have been.

For example, a customer purchases a software package consisting of five modules. The price for a pre-written version of the package is $10,000. The customer has custom modification made to two of the modules at the time of purchase. The charge for the custom-modified software package is $23,000. Accordingly, the custom modified package is exempt as custom-modified software.

Library of codes

Staff should be aware that programmers may also use the term "module" to refer to pre-written blocks of code that are used to develop a new software program. In this situation, each "module" incorporated into the new program is not capable of operating as a software program on its own. For example, a module may only be a pre-written block of code to execute a particular function, which must be combined with other pre-written functions to create a software program. The programmer writes a new and distinct program by assembling the pre-written blocks of code in a new way.

• Where a program is created by assembling such blocks of pre-written code, and the resulting program is sold or leased to more than one customer, PST applies to the purchase. This is considered to be the sale of software that is neither custom software nor custom modified software.

• Where a new and distinct program is developed solely to meet the requirements of a specific customer by assembling such blocks of pre-written code (or "modules"), the resulting program is considered to be a custom software program.

R.2 Modification Versus Configuration (Issued: 2014/07)

The definitions of "custom modified software" and "custom software" refer to "modify" or "modification".

Merely configuring software does not meet the test for modification. Configuring software involves inputting data so the program executes properly. Even where the information being input during configuration is unique to the customer, such as entering the customer's name or other specific information about their business operations, the service does not qualify as "modification." For example, choosing the printer drive required by the customer from a list of options presented by the program does not involve a modification to the program code. The choice is built into the existing program.

Caution: Generally, "configuring" is used to describe a service that does not involve adding to or changing the program code. In some cases, however, a programmer may use the term "configuring" in a context where the program code has been modified. If there is any uncertainty, it is important to determine specifically the type of service that has been provided, rather than relying solely on the terminology used.

R.3 Monthly Or Periodic Billing For Software Modifications (Issued: 2014/07)

Where a customer is issued a monthly or periodic billing for software modifications (i.e., modifications that could be custom modified software) completed during that month or period, PST applies as follows.

• If the contract specifies what the total value of all modifications will be, and that value is greater than the price for the unmodified software (i.e., the definition of custom modified software is met), the monthly or periodic billings are exempt from PST. Each billing is considered to be only a partial payment of the total purchase price for the modifications specified in the contract.
• If the contract does not specify up front what the total value of the modifications will be because the consultant does not know the time or costs that will be involved, but clearly states what the end result of the modifications will be, the consultant must collect and remit PST on each billing until the total of the billings is twice the price for the unmodified software (definition of custom-modified software). Once the PST-exempt status of the contract has been established, further invoice amounts will not be subject to PST, and the purchaser may apply to the ministry for a refund of the PST paid to date.
• Where the modifications are performed over a period of time and monthly or periodic billings are issued, but there is no contract specifying what the end results of the modifications will be, each billing is treated as a separate modification. Tax applies to each billing that is not more than double what the cost would be for the unmodified software. This applies even if a succession of individual billings eventually exceeds the price for the unmodified software.

R.4 Upgrades To Custom Modified Software Or Custom Software (Issued: 2014/07)

An upgrade to existing custom modified software is exempt if the upgrade itself meets the definitions of either "custom modified software" or "custom software" and the conditions for exemption under PSTERR subsection 68(2) are met.

An upgrade to custom software may also be caught under paragraph (b) of the definition of "custom software" and is exempt when conditions for exemption under PSTERR subsection 68(2) are met.

R.5 Additional Licenses For Custom Modified Software Or Custom Software (Issued: 2014/07)

Additional licenses for the right to use custom modified software or custom software continue to be exempt provided the license is with the specific person for whom the software was developed or modified for that person's own use. In this case, the new license still meets the definition of custom software or custom modified software.

PST applies to licenses for the software that are sold to persons other than the person for whom the software was developed or customized.

R.6 Software Sold As Part Of A Going Concern (Issued: 2014/07)

The exemption under PSTERR subsection 68(4) only applies if the software is sold as part of a business that is sold as a going concern.

A going concern is a commercial enterprise actively engaging in business with the expectation of indefinite continuance. A business is sold as a going concern if the buyer intends for the business to continue operating as a business.

The exemption applies when the entire business or a business line is sold. A business line is a distinct, severable part of a larger business that could be considered a business on its own. For the exemption to apply, the software must be associated with the particular business line that is sold. For example, a grocery business consists of three separate divisions: wholesaling, retailing and advertising/publishing operations. Each division has its own separate custom software. If the grocery business sells off its advertising/publishing business line as a going concern, then the custom software for these operations may be eligible for exemption.

R.7 Specific person (Issued: 2020/12)

This ruling applies also to the corresponding provisions under PSTERR section 59 [Custom software, custom modified software and other software].

In accordance with sections 2 and 28 of the Interpretation Act, each reference to “specific person” under PSTERR 68 includes the plural. Therefore, software can be “custom software”, “custom modified software”, or modified software described under PSTERR 68(4), if it is developed or modified to meet the requirements of more than one person. It can qualify under PSTERR 68(2) if it is obtained by or on behalf of specific persons for their own use. Documentation supporting an exemption claim under PSTERR 68(2), (3) or (4)—e.g., the contract, the design and implementation plan, or a written statement from the developer—should identify all the specific persons and their requirements.

PSTERR 68(2), (3) and (4) do not exempt the following:

• Software developed or customized for a class of persons (e.g., for accounting businesses). The exemptions require the software to be developed or customized for clearly identified persons, such as a particular group of corporations.

• Software developed or customized with the intention of marketing it to specific persons only some of whom might decide to buy it. The exemptions require the software to be developed or modified “solely to meet the requirements” of a specific person or specific persons, rather than simply to market it to a person or persons.

Section 68.1 – Software Purchased By First Nation Individual Or Band

PSTERR - SEC.68.1/Int.

References:

Act: Section 1 "electronic device", "software", "use"; Part 4; Section 145

PSTERR: Section 1 "band", "First Nation individual", "First Nation land"

Bulletin PST 314

Interpretation (Issued: 2014/02)

Effective April 1, 2013, OIC 441/2013 added PSTERR section 68.1.

Subsection 68.1(1) provides that software is exempt from tax imposed under Part 4 [Taxes in Relation to Software] of the Act if the software is

(a) purchased by a First Nation individual or a band, and

(b) for use on or with an electronic device that is

(i) owned or leased by the First Nation individual or band, and

(ii) ordinarily situated on First Nation land.

Subsection 68.1(2) provides that PSTERR subsection 68.1(1) is prescribed for the purposes of paragraph 145(1)(b) [provisions providing exemptions in relation to software] of the Act.

Section 69 – Software Incorporated Into Prototypes

PSTERR - SEC.69/Int.

References:

Act: Section 1 "prototype", "software"; Section 113

Bulletin PST 209

Interpretation (Issued: 2014/02)

Effective April 1, 2013, B.C. Reg. 97/2013 provides under PSTERR section 69 that for the purposes of paragraph 113(1)(d) [exemptions in relation to software for prototypes] of the Act,

(a) software that is not specifically designed for a prototype referred to in that provision is prescribed software, and

(b) making a copy of a prototype solely for the purpose of testing the prototype as part of the research and development activities referred to in that provision is a prescribed purpose.

Division 2 — Evidence Relating to Exemptions under Act in Respect of Software

Section 70 – Evidence Relating To Exemptions Under Section 113 (1) Of Act

PSTERR - SEC.70/Int.

References:

Act: Section 1 "collector", "director", "registration number"; Section 113; Section 145

PSTR: Section 86

Bulletin PST 105

Interpretation (Issued: 2014/02)

Effective April 1, 2013, B.C. Reg. 97/2013 provides under PSTERR section 70 that for the purposes of subsection 145(1.1) [evidence required to claim certain exemptions in relation to tangible personal property or software] of the Act, in relation to a person who alleges that software is exempt under subsection 113(1) [exemptions in relation to software] of the Act, the collector is required to obtain

(a) that person's registration number, or

(b) if that person does not have a registration number, a declaration in a form acceptable to the director (a Certificate of Exemption – General (form FIN 490)).