Are POS Machine Providers Making Taxable Supplies?

The Canada Revenue Agency (CRA) has recently initiated an audit program that is targeting member service providers who are engaged in credit card services, including businesses that provide point-of-sale (POS) systems to merchants. This new initiative can muddle tax issues for these providers who may be left wondering, “Are POS machine providers making taxable supplies?” If you are concerned about how this issue may affect your tax situation, consider contacting Jeremy Scott Law at (902) 403-7201. You can speak to a knowledgeable tax lawyer during a confidential consultation.

What Is a Point of Sale?

A point of sale provides a mechanism for a customer to purchase goods or services, usually in retail establishments. The customer enters his or her credit or debit card at the POS terminal. Retailers sometimes use POS systems strategically. They may introduce them at different points in the sales funnel and offer them at physical locations that correspond with potential purchasing decisions. Many businesses set up these systems near store exits in the hope that customers will make impulse purchases before they leave the establishment. Additionally, retailers may place these machines in other locations to market particular goods or services. However, there are also virtual point-of-sale systems that allow customers to use a computer or their phones to complete transactions.

Process of Using POS Systems

Member service providers generally do not offer goods or services to retail establishments. Instead, they usually enter into contracts with credit card payment processing companies. They typically provide the mechanism for merchants to accept card payments. Additionally, the member service providers may negotiate fees with the merchants. They may also install and operate the devices to accept card payments. Retailers can include card readers and barcode scanners to make these systems even more functional and integrated.

Benefits of Point-of-Sale Systems

Point-of-sale systems create an electronic record of all the transactions that are carried out through the system. Point-of-sale systems typically include software and an electronic cash register, but more advanced systems may come with additional features, such as card readers and barcode scanners. The systems automate the transaction process and track a business’s sales data. For example, a restaurant that has a point-of-sale system can track how many dishes have been sold, when those dishes were sold, and to whom they were sold.

Additionally, POS systems provide a method for the business to track who has used its goods or services. These systems store information about transactions, which companies may use for marketing and information purposes. Some point-of-sale systems allow customers to place orders, make reservations, and pay bills online. A fully integrated point-of-sale system may allow a business to do any of the following:

• Track inventory
• Assess pricing accuracy
• Track consumer behavior changes after price adjustments
• Track possible theft or shrinkage in a company
• Estimate gross revenue
• Identify sales patterns
• Identify cash flow issues that could harm the business
• Anticipate purchasing decisions and customer needs
• Tailor marketing to match consumer behavior
• Determine how much to pay in sales tax

Tax Treatment of Point-of-Sale Providers

Historically, member service providers have argued that their supplies are exempt and are “financial services” as defined in subsection 123 (1) of the Excise Tax Act. Financial services is specifically defined in this section, but none of those words explicitly use the phrase “point of sale.” However, this definition does state that “the exchange, payment, issue, receipt, or transfer of money, whether effected by the exchange of currency or by crediting or debiting accounts” is a “financial service.” However, the CRA has taken the opposite position that member service providers make taxable supplies. According to this position, member service providers are required to collect goods and services tax (GST) and harmonized sales tax (HST) for these supplies and remit payment to the Canada Revenue Agency. According to the CRA, member service providers market and promote their services, recruit prospective merchants, and provide after-sales services, such as installing credit card processing machines and offering training to merchants. Accordingly, the CRA characterizes these services not as “financial services” but as other services that are taxable.

While this is the CRA’s official position, current litigation in tax court is ongoing. Recent court decisions can impact the treatment of these services. For example, in one 2021 case, the Tax Court of Canada ruled against the CRA, finding that the dominant form of services the taxpayer provided were exempt as financial services and that the taxpayer’s promotional, advertisement, or administrative services were secondary in nature and did not disqualify the exemption for GST/HST.

How a Tax Lawyer Can Help

As mentioned above, the tax treatment of POS services is still under debate and is a complex legal issue. Even with the recent 2021 court decision, the CRA is taking a narrow interpretation of the decision and continuing to pursue POS providers for GST and HST taxes. A tax lawyer can carefully monitor the status of pending cases and how they develop to see how these services are treated for tax purposes. Additionally, a tax lawyer can review a POS business’s GST and HST treatment regarding those supplies and review its agreements with its members.

Contact Jeremy Scott Law for More Information

At Jeremy Scott Law, you will find a Canadian tax lawyer with nearly two decades of legal experience in tax law. Having worked with a variety of clients, this experienced lawyer is accustomed to helping taxpayers navigate complex tax topics, such as the payment of harmonized sales tax. A skilled lawyer can handle communication with tax authorities and ensure the proper application of tax laws. Jeremy Scott Law provides tax guidance and assistance, and the knowledgeable tax lawyer can answer your legal questions, such as, “Are POS machine providers making taxable supplies?” Tax lawyers stay up to date on the latest changes in tax law. Therefore, if you are concerned about how this recent tax audit initiative may impact you, consider contacting Jeremy Scott Law by calling (902) 403-7201 to schedule a confidential consultation.