I ran a consulting business in Ontario Canada from 1999-2004
Today the provincial sales tax is included (harmonized) with the federal sales tax as the HST (8% + 5% = 13%) but
back then they were charge separately as PST and GST. Each tax act treated software and software services differently.
When we started we were compatriots with many such contractors in the city. They said, confirmed by our accountant, that our services were not PST eligible so we collected and submitted only the federal GST. This we did for 5 years without any incident; like an audit from the province.
In 2004 our business failed and we were in the process of closing up shop when the feds audited our GST history and found that
in 2001-2004 our GST submissions were off and we owed about 30k incl interest and files. We made arrangements to pay the bill.
Painful but under control.
But, the federal audit triggered a provincial audit and that's when we discovered that the rules for PST regarding software/it services had changed during our run, making the work we did subject to the 8% PST. The rules for that are eerily similar to those described in the OP.
The provincial government determined that the changes to The Act were retroactive and covered all the business we ever did and that with interest and penalties we owed over 700k payable by the end of that week or they would take action.
The company was broke so he action we were threatened with was that, as officers of the company, we were personally liable for the amount and that if not paid by the end of the week, our personal bank accounts would be frozen. This was not good.
Further we found out that at that time, these rules were only enforced when a PST audit occurred. So, when we told the many contractor pals in town that this could be a problem for them. a) they didn't believe it, and b) AFIK none of them changed their practice of collecting only the GST.
Anyways, there was a loophole where a customer could assume the liability for the PST by giving us a waiver form. Luckily the majority of our work was with one customer, a huge corp, who agreed to do this and we were off the hook.
It was a very stressful week.
PS. I have not done any consulting since 2004 so I am not aware of any subsequent changes to The Act. AFIK, none of the contractors I know were dinged the way we were. I figure that harmonization of the taxes means they are collecting tax for both govt entities now.
Your customer voluntarily offered to give away $700k out of the kindness of their hearts, to help the officers of a failed former vendor? Regardless of the size of the corporation, that's pretty incredible. Any idea why they agreed to do that?
Simple. Our former customer is a megacorp and their legal department was not worried about it.
[added] The definition of "taxable service" may or may not have applied in our case. We were without resources to challenge the fact so as far as we were concerned the ruling and payment demand would stand as presented. The mega corp was so large that they had a legal department devoted to minimizing tax and this was just one more thing that department dealt with. A very small thing in relation to the overall dealings of the customer.
For sure, it just seems like the megacorp's legal department would be more likely to decide that the easiest way to minimize the tax was to not voluntarily accept it in the first place.
When we started we were compatriots with many such contractors in the city. They said, confirmed by our accountant, that our services were not PST eligible so we collected and submitted only the federal GST. This we did for 5 years without any incident; like an audit from the province.
In 2004 our business failed and we were in the process of closing up shop when the feds audited our GST history and found that in 2001-2004 our GST submissions were off and we owed about 30k incl interest and files. We made arrangements to pay the bill. Painful but under control.
But, the federal audit triggered a provincial audit and that's when we discovered that the rules for PST regarding software/it services had changed during our run, making the work we did subject to the 8% PST. The rules for that are eerily similar to those described in the OP.
The provincial government determined that the changes to The Act were retroactive and covered all the business we ever did and that with interest and penalties we owed over 700k payable by the end of that week or they would take action. The company was broke so he action we were threatened with was that, as officers of the company, we were personally liable for the amount and that if not paid by the end of the week, our personal bank accounts would be frozen. This was not good.
Further we found out that at that time, these rules were only enforced when a PST audit occurred. So, when we told the many contractor pals in town that this could be a problem for them. a) they didn't believe it, and b) AFIK none of them changed their practice of collecting only the GST.
Anyways, there was a loophole where a customer could assume the liability for the PST by giving us a waiver form. Luckily the majority of our work was with one customer, a huge corp, who agreed to do this and we were off the hook.
It was a very stressful week.
PS. I have not done any consulting since 2004 so I am not aware of any subsequent changes to The Act. AFIK, none of the contractors I know were dinged the way we were. I figure that harmonization of the taxes means they are collecting tax for both govt entities now.