Determining whether contracts are for the sale of tangible personal property or for provision of services is often of central importance in provinces still levying Provincial Sales Tax (“PST”).  This issue has been the subject of on-going litigation in the context of providing oilfield services to oil and gas exploration companies in British Columbia and Saskatchewan.  A recent case from the British Columbia Court of Appeal (“BCCA”) provides practitioners with increased guidance on how to avoid application of PST on materials used in the provision of oilfield services.  The bottom line still remains:  get advice early and often !

In B.C. v. Burlington Resources Canada Ltd., 2015 BCCA 19, BJ Services Company Canada (“BJ”) provided oil well cementing services to the plaintiff, Burlington Resources Canada (“Burlington”) (an oil and gas exploration company) on Crown held land.  BJ was required to pour cement between the outside of the oil well casing and the wellbore.  Once set, the cement became part of the Crown’s realty through accession (the operation of law whereby the ownership of personal property is transferred to the owner of the real property to which the tangible property becomes affixed). 

BC’s Social Service Tax Act imposed PST on the purchase of tangible personal property.  BJ did not charge Burlington PST on the materials used in the provision of the services (namely, cementing materials).  B.C. assessed Burlington on the basis that PST applied to the material because Burlington purchased the materials as tangible personal property.  Burlington argued that no PST applied because its contract with BJ was a contract of service and Burlington never had possession of the materials, until they set and became part of the realty.

The Trial Judge agreed with Burlington and set aside the assessments.  B.C. appealed to the BCCA.   

In an overwhelming endorsement of the Trial Judge’s decision, the BCCA dismissed the appeal.  In fact, the decision is unique for the significant extent to which it quotes the Trial Judge’s reasons. 

The BCCA held that many of B.C.’s assumptions were either assumptions of law or mixed fact and law on which B.C. was not entitled to rely. The BCCA agreed with the Trial Judge that Burlington demolished B.C.’s assumption that the materials were purchased by Burlington at the time of delivery to the well site, but before installation into the real property.  In support of this, the court noted that the contract indicated that all risk remained with BJ, until title passed to Burlington on acceptance of the products or equipment.  It was also noted that the cement had to set before BJ would be paid and that the contract reflected that BJ purchased the cement for its own use in performing the services.

In light of that conclusion, the BCCA went on to consider whether the assessments were valid; however, it did not provide much of its own analysis and simply quoted and agreed with the conclusions of the Trial Judge.  The BCCA agreed that the possession of the cementing material was never transferred to Burlington by BJ as there was no air of reality to the contention that Burlington would purchase the materials when they arrived on site, since the site was completely controlled by BJ and Burlington’s interest was only in the final product.  The materials had lost their character as tangible personal property and had become part of the realty, and were not transferred to Burlington prior to that conversion.   Accordingly, the BCCA agreed that the assessments could not stand.

Notably, the Saskatchewan decision of Husky Oil Operations Ltd. v. The Queen, 2014 SKQB 116, dealt with recovery of PST paid on similar services (also provided by BJ).  Husky Oil was decided in between the Trial Judge’s decision and the BCCA decision in Burlington, and came to a different conclusion. 

In Husky Oil, the Burlington trial decision was distinguished on the basis of various contractual differences.  Primarily, the Saskatchewan court seemed to put significant weight on the distinguishing feature of the control of the materials, in providing the services.  In Burlington, the contract indicated that BJ had exclusive control over the cementing material until they were completely installed.  In contrast, it was Husky that had ultimate control of the cementing services provided at its well site.  Husky also paid for the cement whether or not it was used, whereas Burlington did not pay for materials delivered to the site that were not used. 

The two decisions reviewed above can be reconciled on the basis of the significantly different contracts in place between the parties.   Together the Burlington and Husky Oil decisions illustrate the difficulty that can arise where contracts have perhaps been structured without the necessary commodity tax advice, as in both instances, it would likely have been possible to insert the contractual language into the contracts that could have disposed of the issue as to tax status fairly quickly – and perhaps avoided the litigation that was required in these two cases.  Of course, that will require that the parties come to an agreement on same, as tax avoided by the purchaser is generally required to be paid by the supplier.   Generally speaking, there is a tax bias to contracting for the provision of real property services, and having the supplier pay tax on its cost base.   Adjusting the purchase price of the real property services to take into account expected PST effects on the supplier then allows for the sharing of the tax burden between the parties, as appropriate.