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Facebook and Instagram break rank with other tech platforms, will charge sales tax in Canada

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Facebook will become the first foreign-based technology giant to start charging sales tax on advertisements purchased through their physical offices in Canada—a move that could generate millions in revenue for governments and put pressure on other large technology companies, including Netflix, Google and Amazon.

For several years, many Canadian tech and media companies have urged the federal government to change the law that exempts foreign digital companies from charging sales tax but requires their domestic competitors to do so. Prime Minister Justin Trudeau said he wouldn’t alter the law during his 2015 election campaign; various senior ministers have reiterated that position over the past three years.

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The new measure is part of a worldwide move by Facebook and Instagram—which the social media giant acquired in 2012 for US$1 billion—to collect and remit taxes everywhere they have local sales teams. It will only affect advertisement purchases made through sales teams in Canada, not purchases conducted directly online.

Talking Point

Facebook and Instagram will charge sales tax on advertisements purchased through their physical offices in Canada, in a break with other tech giants that have resisted calls to do so for years. Airbnb, Netflix, Google and Spotify said they would start collecting tax, too, if laws are changed forcing them to do so.

“Our move to the local selling model should be in place globally by mid-2019,” said Meg Sinclair, a spokesperson for Facebook. “This is a significant undertaking with different laws in each country, so our primary focus is making sure we get this right.”

The company has about 110 employees working in offices in Montreal, Toronto and Vancouver, the majority of whom are in sales. Those teams primarily serve major advertisers and agencies across Canada who make large, sometimes multi-year, purchases. Small- and medium-sized businesses making one-off purchases are more likely to do so directly online.

It is unclear how much revenue will be generated for the federal or provincial governments via the collection of sales tax by Facebook and Instagram. Facebook did not offer an estimate.

A January 2018 briefing note prepared for then-heritage minister Mélanie Joly, obtained via an access to information request, states that Facebook doesn’t make its Canadian advertising revenues public, but cites an estimate that “72 per cent of the $5.5 billion spent on advertising in Canada in 2016 went to Facebook and Google.” That works out to about $4 billion for the two companies.

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The Logic asked eight other foreign-based tech companies if they would start charging sales tax (such as HST, PST and GST) on purchases in Canada in light of Facebook’s decision. While their responses varied, Airbnb, Netflix, Google and Spotify indicated a willingness to comply with any new digital sales tax legislation. eBay claimed it doesn’t directly sell items. None of the companies said they had plans to proactively start collecting sales tax. The only exception is Uber, which already collects sales tax. Apple and Amazon did not reply to multiple requests for comment.

Pressure has been building in Canada to change the laws affecting digital sales tax. Quebec passed a law requiring foreign online services that have over $30,000 in provincial revenues—including Apple, Spotify and Netflix—to collect sales tax from their customers starting on Jan. 1, 2019. The province estimates it was losing out on $270 million annually by failing to collect sales tax for online purchases in Quebec.

Where They Stand

The Logic asked eight other foreign-based tech companies if they’re going to start charging sales tax (such as HST, PST and GST) on purchases in Canada in light of Facebook’s decision. Here are their responses:

 

Airbnb: “Airbnb wants to be regulated and our community wants to pay their fair share of taxes. We remain committed to working with governments on creating fair, sensible rules for home sharing, including a fair and reasonable tax solution,” said Lindsey Scully, an Airbnb spokesperson.

 

Netflix: “Netflix pays all taxes where required by law,” said Bao Nguyen, a Netflix spokesperson.

 

Google: “Google has made prior public statements confirming that should the federal government create legislation to require the collection of value-added taxes on digital sales, we would comply with that legislation. Quebec passed legislation that will require the collection of Quebec Sales Tax, which will start as of January 1, 2019. We expect to comply with that legislation,” said Nicole Bell, a Google spokesperson.

 

eBay: “eBay is not the seller of items sold on eBay. Canadian residents are charged GST/HST/QST on the fees they pay to eBay for using our platform,” said Camille Kowalewski, an eBay spokesperson.

 

Uber: “Sales tax already applies on all Uber rides and Uber Eats food delivery orders in Canada,” said Xavier Van Chau, an Uber spokesperson.

 

Spotify: “We would comply with local tax laws whenever obligated,” said Graham James, a Spotify spokesperson.

 

Amazon: Did not reply to multiple requests for comment.

 

Apple: Did not reply to multiple requests for comment.

In June, the U.S. Supreme Court ruled that internet retailers could be required to collect sales tax even when they don’t have a physical presence in an individual state. The ruling said that local companies are put at a competitive disadvantage by remote sellers that aren’t required to pay tax.

Canada’s federal government has repeatedly argued the opposite. In February, a spokesperson for Joly said that sales taxes on digital services provided by foreign companies need to be considered, at the time the government said they would not be imposing new taxes in the short term. The Logic asked newly-minted Heritage Minister Pablo Rodriguez whether the government would ask other foreign-based digital companies to follow Facebook’s lead, or change legislation to compel them to do so. Questions sent to Rodriguez were directed to Finance Minister Bill Morneau’s office. Morneau did not answer any questions.

Instead, Jack Aubry, a spokesperson for the Department of Finance, indicated Canada is studying the issue, saying, “The international community has agreed to examine the impacts of digitalisation on some key aspects of the existing tax framework and to work toward a consensus-based approach. With this in mind, Canada will continue to engage in the multilateral review.”

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