Canadian Court: Websites Must Collect Taxes From Nonresidents

The decision came after Dawn’s Place appealed a tax assessment for failure to collect Canada’s 6 percent GST. A lower tax court ruled in favor of the adult website, but the company was unable to persuade the appellate court that site’s dealing in digital media — Dawn’s Place sells picture and video downloads via a $19.95 monthly membership — are exempt from collecting the tax.

“Perhaps in a fit of pique over its inability to tax Canadians' consumption of digital pornography the Crown appealed the decision,” a spokesman for the Canadian Association of Internet Providers said. “It highlights the government's narrow view of the scope of the zero-rating rule, but, more importantly, it undercuts the basic principle of the tax.”

Ariane Boyer, a spokeswoman for the Canada Revenue Agency said the law governing collection of GST was quite clear.

“The Excise Tax Act does not provide an exemption for GST or HST for subscription fees for access to information on a server to Canada — even when the subscriber is physically located outside of Canada,” she said.

Dawn’s Place may appeal the court’s decision to Canada’s Supreme Court.

In the meantime, CAIP, a national trade group for website operators, has told its members to review their billing practices related to GST collection. The group called the court’s ruling a “very unhappy situation.”

“Unlike many vendors who can collect GST later if they missed it, websites are most probably unable to correct the past, and will face exposure to assessment for the past four years on their transactions with non-residents,” the spokesman for CAIP said, adding that the ruling puts Canadian websites at a competitive disadvantage.

Canadian tax attorney Jonathan Spencer said it is very difficult for websites to determine the residential status of their users. He added that the court’s decision was troubling because Canadian law removes the tax from goods that are deemed copyrighted material. However, there is no specific provision in Canadian tax law extending the copyright exemption to digital media.

According to Spencer, there had been an assumption that the copyright exemption applied to digital media. The court’s ruling calls that into question, he said.