GST—The Goods and Software Tax
Mark Weller
It seems that Revenue Canada is mad at Bill Gates. Why? It appears that his plan to allow people to purchase software directly from Microsoft over the Internet has them running scared. The process would go something like this: I log in to the Microsoft web site; I choose a product I would like to purchase; the server posts a message asking me for my credit card number; I type in the number, and the charge is processed. Ideally, the computer informs me that my card has been approved, and the transaction is complete. Now that I have paid, I am given access to a secure site from which I can download the software I purchased.
No middle-man. No Canada Post. Sounds great.
The problem is, where does the transaction take place? Is it on the Microsoft server? Is it at my geographic location where I have typed in my credit card number? Is it at the location where the purchase is approved? All of this matters when one attempts to charge sales tax.
Revenue Canada is concerned that Internet transactions are a way for increasing numbers of Canadians to beat the GST. Already dozens of organizations provide this kind of service, and when the credit card bill comes in the mail, no GST is charged. Of course, for American companies, the charges are made in U.S. equivalents, which tends to lend credence to the notion that the transaction is happening outside of Canada.
This problem is similar to the one that the government faced a few years back with catalogue sales and the GST. People were ordering products from the U.S., but in many cases were not paying the GST when the parcels crossed the border. The government's "solution" was to impose a special Canada Post processing fee on companies shipping into Canada.
However, with the Internet there are no real borders. In fact, transactions happen in cyber-space. So how do you patrol a virtual border?
Microsoft is not interested in collecting taxes for foreign jurisdictions. The cost of implementing a computer system that could process all the various tax requirements of hundreds of jurisdictions worldwide would be prohibitive. For instance, in the case of British Columbia, one would have to charge both PST and GST, whereas in Alberta's case, one would charge only the GST.
Another solution would be to have national servers. So Canada would have a Microsoft Internet store in Toronto, and Germany would have one in Bonn. At the moment, however, this is not in the works.
So, will Revenue Canada sue Bill Gates? Probably not. More likely, the tax department will develop a way to tax transactions that are made by Canadians in cyberspace. For instance, Microsoft could report all the Canadian transactions to Revenue Canada every few hours, and then the government could run through all of the tax charges. So your bill would indicate a charge for a piece of software, and then a few lines down there would be a taxation charge.
Thus begins the era of virtual taxation. One can imagine that sometime in the not so distant future, Revenue Canada might see fit to debit your bank account directly via Interac.
Of course, the one thing the government may wish to consider is how many of these transactions would cease to be reported. And it thinks the underground economy is big now . . . .
This article originally appeared in the January 1997 issue of Fraser Forum.
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