Information and Disclaimer
This interpretation letter was issued based on the specific circumstances or situation of a taxpayer or vendor and the law and tax policy in effect at the time the ruling was issued. Specific facts relevant to your situation may change the application of the tax. In accordance with the Freedom of Information and Protection of Privacy Act, all confidential and identifying information has been removed from this interpretation letter. Please be aware that any statute or policy referred to in this letter may have been superseded. Where a letter contains links to a publication, the link is to our current publication on that subject, regardless of the date that the ruling was originally issued, and the current publication may not be reflective of the information originally provided. In no event shall the Government of Ontario be liable for any damages whatsoever arising out of, or in connection with, the use of the information contained herein.
Interpretation Letter AGD-0006, August 2004
Thank you for your facsimile dated November 26, 2002 regarding the application of Ontario retail sales tax
(RST) to the operations of a graphic designer.
This interpretation is based on the information provided and which is conveyed in the "Understanding of
Facts" portion of this ruling. Please review the information for its completeness and accuracy. If it is
determined that the information is incomplete or inaccurate, this interpretation will not be binding. In the
event that our understanding of the facts is inaccurate or incomplete, please notify the undersigned, in
writing, so that we may reconsider our opinion.
Understanding of Facts
It is our understanding that you will be giving a presentation on the application of RST to graphic design
services. You have requested information regarding the ministry's policies and procedures in this area.
Legislation and/or Administrative Policy
Subsection 2(1) of the Ontario Retail Sales Tax Act (Act) requires every purchaser of tangible personal
property (TPP) to pay RST calculated on the fair value in respect of their use of the TPP in Ontario.
Section 1 of the Act defines "fair value" to include all of the elements that together form the cost of goods
on which the tax is calculated.
Artwork and/or Graphic Design Services
The creation of lay-outs, designs, typesetting, camera-ready or plate-ready artwork is the production of
TPP and is taxable. RST must be charged, collected and remitted on the charges to clients for designs
that will be used, either by the graphic designer or an outside printer, to produce taxable printed matter for
the customer since the design forms part of the fair value of the printed matter. If a design is being used
to produce exempt printed matter or the printed matter is being purchased by the client for the purpose of
resale, the client must give the graphic designer a properly completed purchase exemption certificate
(PEC) in order to claim an exemption from RST.
Drawings, illustrations and the like, used to present ideas to the client before a concept is agreed upon,
are non-taxable services. However, once a concept is agreed upon and the design is complete, RST is
applicable on the design as well as on any consultation services performed after the concept is agreed
upon and accepted by the client. The consultation services performed after the concept is agreed upon
become part of the fair value of the design and therefore subject to RST.
Where the graphic design company designs and prints (or arranges for the printing of) literature or other
printed materials, RST must also be charged on the total amount billed to its customer, i.e., design and
printing, even if the printing is purchased from an outside source.
Graphic designs that are provided to the customer electronically or via the Internet are not TPP and are
therefore not subject to RST. The provision of graphic designs electronically or via the Internet is the
provision of a non-taxable service. Graphic designs which are provided to the client in hard copy (i.e. on
disk, CD or paper) as well as electronically, are subject to RST.
Manufacturing
A "manufacturer" is defined under section 1 of Regulation 1013 under the Act as a person who
manufactures, fabricates, produces or assembles as applicable, tangible personal property for sale, where
the fair value of such tangible personal property sold to others exceeds $5,000, or where the fair value of
such tangible personal property manufactured for that person's own use, exceeds $50,000 in the fiscal
year.
Graphic designers may qualify as manufacturers provided the sales value of the goods they produce
exceeds $ 5,000 in a fiscal year, or if the manufactured cost of goods produced for own use exceeds
$50,000 in a fiscal year. A business that is considered a manufacturer may purchase all production
equipment, used primarily and directly in manufacturing (e.g., more than 50% of the time), exempt from
RST. Such equipment would include computers, printer, graphic design software, and ink cartridges.
Items such as tables for the printer and computers would not qualify as exempt production equipment
because they are not used directly in the production process.
Where the same equipment is used to provide a non-taxable service (i.e. graphic design provided
electronically), as well as in the production of tangible personal property (i.e. graphic design provided on a
CD), the manufacturer would be entitled to an exemption/refund only on machinery and equipment used
primarily (i.e., more than 50%) in the production of TPP.
Web Site Design
The creation of a web page design may qualify as a non-taxable service, however, a number of factors
must be considered. The nature of the transaction must be agreed upon at the time of purchase and
should be detailed in the contract between the designer and the purchaser.
With the advance in technology, web pages have evolved into more than just static images. As a majority
of web pages are developed using a "presentation style language" rather than a "programming language",
they do not normally qualify as taxable computer programs. However, many web pages contain a variety of
animated buttons, sound clips, flashing messages, pop-up windows, or scrolling status bars and banners.
Most of these animated buttons are developed by using a scripting language and require a web browser to
interpret their language/instruction. The scripting language is not compiled into an executable format until
the web browser reads the code embedded in the web page. Therefore, for RST purposes, these
web pages containing applets do not qualify as taxable computer programs.
If a program or applet is sold separately from the development of a web page and it qualifies as a taxable
computer program, RST applies. However, if the program or applet was designed and developed solely to
meet the specific requirements of, and was intended for the exclusive use of, a particular person it
qualifies as a "custom computer program", which is exempt from RST. Computer program developers are
required to pay RST on all taxable goods and services, including any licence fees or programs, purchased
to develop a custom computer program.
RST does not apply to the sale of web page designs provided the following conditions are met:
- the design is transferred to clients electronically, or placed on the Internet, and
- it is not provided in a hard copy version (i.e., disk, CD or paper copy), and
- the web page does not qualify as a taxable computer program.
If a web page design qualifies as a taxable computer program, RST applies regardless of whether the
design is provided electronically. As well, RST would apply to any design provided in a hard copy version.
Web page designers are required to pay RST on all taxable goods and services purchased to develop a
non-taxable design.
RST does not apply to proof or approval sheets sent to clients before a concept is agreed upon.
Many web pages contain electronic advertising or links to other businesses, clubs, associations, etc.
Electronic advertisements, placed within a web page, can take on many forms such as a flashing banner at
the top of a page. Advertising fees charged to place an electronic advertisement is a non-taxable service.
Analysis and Conclusion
Design Services
Drawing or graphic designs that are provided to the customer electronically or via the Internet are not TPP
and are therefore not subject to RST. Files sent electronically to a newspaper on behalf of the customer,
are also not subject to RST. Where the vendor copies a file from a CD unto the customer's computer and
does not give the customer the CD, it is the provision of a non-taxable service and no RST should be
charged.
Where a graphic designer provides drawings or graphic designs on disks, CDs or other hard copy formats,
RST applies to the total selling price billed to the customer, unless the customer claims a conditional
exemption and provides you with a properly completed PEC. If the drawings or graphic designs are sold
to the customer both in hard format and via the Internet and/or electronically, the entire transaction is
subject to RST.
Where a graphic designer designs and prints (or arrange for the printing of) literature or other printed
materials, RST must also be charged on the total amount billed to the client, i.e., artwork and printing,
even if the printing is purchased from an outside source. The graphic designer may provide a properly
completed PEC to the outside printer as he/she is purchasing the printed goods exempt of RST for resale
to your client.
Drawings, proofs, illustrations and the like, used to present ideas to the client before a concept is agreed
upon, are non-taxable services. However, once a concept is agreed upon and the design is complete,
RST is applicable on the design as well as on any consultation services performed after the concept is
agreed upon and accepted by the client. The consultation services performed after the concept is agreed
upon become part of the fair value of the design and therefore subject to RST.
Web Site Design
The development of a website is a non-taxable service provided the website does not contain a taxable
computer program and the website is placed directly on the Internet or is provided to the customer
electronically. We do not consider an applet that is produced using a scripting language to be a taxable
computer program because it is not written in an executable format and requires a web browser to
interpret it. If the website does not contain a taxable computer program but is provided to the customer in
hard copy format ( i.e. disks, CD, paper), it is subject to RST. Web designs that are sold to the customer
in both hard copy format and via the Internet and/or electronically, are also subject to RST.
Where a website contains a taxable computer program, the entire selling price of the design is subject to
RST, regardless of the method of delivery. The vendor cannot separate the charge for the taxable
computer program from the other design charges to avoid charging RST on the entire selling price.
Exemptions
If a customer such as a charitable organization, educational institution or a government organization
qualifies for an exemption from RST, they must provide a properly completed PEC to claim the conditional
exemption. If the customer does not provide a properly completed PEC, RST must be charged. Please
note that it is not a vendor's responsibility to police the Act. A vendor is not required to determine whether
a customer qualifies or is entitled to an exemption. As long as a customer provides a properly completed
PEC, the vendor may accept it and exempt the transaction.
Manufacturing Equipment
If the value of the items produced and sold in a fiscal year exceeds $5,000, then the graphic designer may
qualify as a manufacturer and claim the conditional exemptions for equipment and processing materials
used primarily (more than 50%) and directly in production of the taxable goods, exempt from RST. A
properly completed PEC must be provided to suppliers in order to receive the exemption. Such equipment
would include computers, printer, graphic design software, and ink cartridges. Items such as tables for the
printer and computers would not qualify as exempt production equipment because they are not used
directly in the production process. However, if the equipment and other items are used primarily to
provide a non-taxable service, the a graphic designer must pay RST on the purchase of all equipment and
other items. Please refer to the enclosed Retail Sales Tax Guide #400 - Manufacturers, for more
information.
We have also enclosed copies of Retail Sales Tax Guides 650 - Computer Programs and Related
Services and 651 - Internet Related Services, for your reference.
If you have any further questions, please contact our office.
