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Characterization
of Supplies
For
GST/HST purposes, "property" and
"service" are defined in subsection 123(1) of
the Act.
"Property"
means "any property, whether real or personal,
movable or immovable, tangible or intangible, corporeal or
incorporeal, and includes a right or interest of any kind,
a share and a chose in action, but does not include
money."
"Service"
means "anything other than
(a)
property,
(b)
money, and
(c)
anything that is supplied to an employer by a person who
is or agrees to become an employee of the employer in the
course of or in relation to the office or employment of
that person."
A
supply made by electronic means is not a supply of
tangible personal property. Although tangible personal
property is not defined in the Act, it generally includes
objects or things that may be seen and touched, and that
are movable at the time the supply is made. Electronic
commerce allows suppliers to deliver certain products to
their customers that have been traditionally regarded as
tangible personal property, in an electronic or
"digitized" form. Such supplies are not
considered to be tangible personal property.
As
a result, a supply made by electronic means is
characterized as either a supply of intangible personal
property or a supply of a service. In determining whether
a particular supply made by electronic means is a supply
of intangible personal property or a supply of a service,
the CCRA will consider a number of factors. This approach
considers the nature of the agreement between the supplier
and the customer, and whether the agreement is in
substance for work (or work and materials), or for
property (including a right or interest of any kind).
Factors
that generally indicate that a supply made by electronic
means is one of intangible personal property are:
-
a
right in a product or a right to use a product for
personal or commercial purposes is provided, such as:
- intellectual property or a right to use intellectual
property (e.g., a copyright); or
- rights of a temporary nature (e.g., a right to view,
access or use a product while on-line);
-
a
product is provided that has already been created or
developed, or is already in existence;
-
a
product is created or developed for a specific
customer, but the supplier retains ownership of the
product; and
-
a
right to make a copy of a digitized product is
provided.
Factors
that generally indicate that a supply made by electronic
means is a service are:
-
the
supply does not include the provision of rights (e.g.,
technical know-how), or if there is a provision of
rights, the rights are incidental to the supply;
-
the
supply involves specific work that is performed by a
person for a specific customer; and
-
there
is human involvement in making the supply.
The
following examples illustrate the application of this
approach to supplies that are made by electronic means.
They describe a range of typical supplies made by
electronic means between suppliers and their customers
(e.g., between businesses and consumers), but are not
intended to reflect all types of transactions or
contractual arrangements for such supplies. Consequently,
the characterization of the supplies in the examples is
provided for illustrative purposes, and businesses are
encouraged to request a GST/HST ruling from the CCRA for
certainty in respect of characterizing a particular
transaction.
As
well, each example describes a single supply unless
otherwise stated. Refer to Policy Statement P-077R, Single
and Multiple Supplies, for more information on single and
multiple supplies.
The
examples have been grouped for ease of reference, as
follows:
I.
Electronic ordering and downloading of digitized products
II. Software maintenance contracts
III. Application and Web site hosting and data warehousing
IV. Supplies related to on-line sales
V. Subscription to databases and Web sites
VI. Information provided by electronic means
I.
Electronic ordering and downloading of digitized products
These
supplies typically involve a customer downloading a
digitized product from a supplier, and are generally
characterized as supplies of intangible personal property.
A limitation with respect to the frequency, even to a
single occurrence, or period of use of a downloaded copy
of a digitized product, even to a single occurrence, does
not alter the nature of the supply.
Example
1: Electronic ordering and downloading of digitized
products
A
customer selects an item from an on-line catalogue of
software or other digitized products and orders it
electronically directly from a commercial supplier. There
is no separate charge to the customer for using the
catalogue. The product is downloaded onto the
customer''''''''s computer. For a separate fee, the
customer will receive updates and add-ons to the product,
which are also downloaded directly to the customer''''''''s
computer.
The
supply in this example (i.e., the software or other
digitized products, updates, and add-ons), is delivered
electronically. The product is already in existence as it
is listed in the catalogue and is available for
downloading. The customer is provided with a copy of the
product, as well as the right to use the product.
Consequently, the supply is characterized as a supply of
intangible personal property. Similarly, the supply of the
updates and add-ons is characterized as a supply of
intangible personal property.
Example
2: Limited duration software and other digitized
information licences
A
customer receives the right to use software or another
digitized product for a period of time that is less than
the useful life of the product. The product is downloaded
to the customer''''''''s computer. Upon termination of the
licence, all copies of the digitized product are deleted
or become unusable.
This
is a supply of intangible personal property. Except that
the software or other digitized product can only be used
temporarily, the characteristics of the supply are the
same as in Example 1. Limiting the period of use does not
affect the characterization of the supply as one of
intangible personal property. This rationale applies even
if the digitized product can only be used once.
Example
3: Subscription to a Web site that allows the downloading
of digitized products
A
supplier makes a Web site available to subscribers that
features copyrighted digitized products (e.g., music).
Subscribers pay a fixed periodic fee to access the site
and to select and download digitized products.
This
supply is one of intangible personal property. The
subscribers are acquiring a right to use the digitized
product and to copy it (by downloading) and the product is
already in existence.
II.
Software maintenance contracts
These
supplies typically involve the provision of software
updates with technical support. Technical support may be
provided on-line, through the use of a trouble-shooting
database, or by communications (e.g., telephone or e-mail)
with technicians. These supplies are characterized as
either as supplies of intangible personal property or of
services, depending upon the principal object of the
supply.
Example
4: Software maintenance
A
supplier and customer enter into a software maintenance
contract, which typically bundles software updates with
technical support. The customer is given the right to copy
and use the product for personal or commercial purposes
and is charged a single annual fee for the software
updates and the technical support. The principal object of
the contract is the software updates.
As
the principal object of the supply is the provision of a
software update delivered electronically, the supply is
characterized as one of intangible personal property.
Example
5: Customer support over a computer network
A
software supplier provides a customer with on-line
technical support, including installation advice and
trouble-shooting information. This support is in the form
of on-line technical documentation, a trouble-shooting
database, and, as a last resort, communication with a
technician by e-mail.
If
the technical support is essentially the supply of a right
to use existing technical information in the form of
on-line documentation and access to a trouble-shooting
database, and the interaction with the technician is
incidental, the supply would be characterized as one of
intangible personal property.
If
technical support is provided through interaction with
technicians, and the provision of any rights to
documentation or databases is incidental, the supply would
be characterized as a supply of a service, since it is of
specific work performed for a specific customer.
III.
Application hosting, Web site hosting, and data
warehousing
These
supplies include remote access and use of software, space
on and access to servers to store data or run software,
and technical support. They are characterized as either
intangible personal property or services.
Example
6: Application hosting - separate licence
A
customer with a perpetual licence to use a software
product enters into a contract with a host entity, whereby
the host entity loads a copy of the software on servers
owned and operated by the host and provides technical
support to protect against system failures. The customer
can access, execute and operate the software application
remotely. The application is executed either at the
customer''''''''s computer after it is downloaded, or
remotely on the host''''''''s server. This type of
arrangement could apply, for example, to financial
management, inventory control, human resource management
or other enterprise resource management software
applications. The customer has no control over the
equipment used by the host entity.
The
agreement between the host entity and the customer is to
host software on a server maintained by the host entity.
Since the software licence is held by the customer, there
is no provision of rights in the software or for the use
of the software between the host entity and the customer.
The host entity is essentially providing the space to
store and run the software application on its equipment,
as well as technical support. Consequently, this is
characterized as a supply of a service.
Example
7: Application hosting - bundled contract
For
a single fee, a user enters into a contract whereby a host
entity, which is also the copyright holder, allows access
to one or more software applications, hosts the
applications on a server owned and operated by the host,
and provides technical support for the hardware and
software. The user can access, execute and operate the
software application remotely. The contract is renewable
annually for an additional fee. The principal object of
the contract is the provision of software applications.
This
is similar to the supply in Example 6. However, as the
host entity (rather than the customer) is the copyright
holder for the software, the customer is being provided
with the right to use the software. Although the supplier
is also hosting the software application(s) on its
server(s), and providing technical support for the
hardware and the software, the supply is essentially the
provision of a right to use software. Consequently, it is
characterized as a supply of intangible personal property.
Example
8: Service provider
A
supplier has a licence to use a software application in
the course of its business. It hosts the software on a
server that it owns, operates and maintains. The supplier
enters into an agreement with a customer to manage a
particular back-office function (e.g., the
customer''''''''s payment processing), and provides the
customer with access to the software application, enabling
the customer to perform specific tasks when required
(e.g., data entry, addition of tombstone data for new
suppliers and clients). However, the supplier is
responsible for the major aspects of the payment
processing, such as cheque issuance and bank verification,
and uses the software application to automate these tasks.
The customer has no right to copy the software or use it
other than for the specific functions assigned by the
supplier, and at no time does the customer have possession
or control of the software (since it resides on the
supplier''''''''s server).
The
supply in this instance is for the management of a
particular business function, such as payment processing.
In making the supply, the supplier has the licence for the
necessary software, equipment and personnel necessary to
process payments. The customer is provided with access to
the software for specific tasks, such as entering data.
The provision of the right to use the software for these
specific tasks is incidental to the overall supply being
made by the supplier (e.g., processing payments on behalf
of a customer). Since the supply does not involve the
provision of rights (other than incidentally) or other
property, it is characterized as a supply of a service.
Example
9: Web site hosting
An
Internet Service Provider (ISP) hosts its
customers'''''''' commercial Web sites on its servers. The
ISP does not obtain any rights in the copyrighted material
on the site. Customers can remotely manipulate the site,
including modifying its content, but do not possess or
have direct control of the server(s) used to host the
site. The customer pays a fee based on the passage of
time.
This
is similar to Example 6. The agreement between the
supplier and the customer is to host the customer''''''''s
Web site on a server maintained by the supplier, and the
customer maintains all rights in the site. There is no
supply of rights or of property between the supplier and
the customer, and therefore the supply is characterized as
a supply of a service.
Example
10: Data warehousing
A
customer stores its computer data on servers owned and
operated by a supplier. The customer can access, upload,
retrieve and manipulate data remotely. No software is
licensed, or rights transferred, to the customer in this
transaction. The customer does not have control over or
possession of any specific equipment used by the supplier
in the data storage. For example, a retailer may store its
inventory records on the supplier''''''''s hardware, and
the retailer''''''''s employees may remotely access this
information to allow them to determine whether orders can
be filled from current stock.
This
is similar to Example 9. The agreement between the
supplier and customer is to store the customer''''''''s
computer data on a server maintained by the supplier.
Since there is no provision of rights or property, the
supply is characterized as a supply of a service.
IV.
Supplies related to on-line sales
These
supplies include advertising, referral, and representation
on behalf of on-line suppliers of goods or services. The
suppliers provide a means of bringing consumers and
merchants together on-line, but do not supply the goods or
services being advertised or marketed. These supplies are
generally characterized as supplies of services.
Example
11: Advertising
Companies
pay a fee to Web site operators to place advertisements on
their Web sites. Advertising rates may be determined in a
number of ways, including the cost per thousand
"impressions" (i.e., the number of times the
advertisement is displayed to a user), or the number of
"click-throughs" (i.e., the number of times the
advertisement is clicked by a user). For example,
"banner ads," which are small graphic images
embedded in a Web page, allow a company''''''''s Web page
to be loaded to a user''''''''s computer when clicked by
the user.
An
advertising service is a service of creating a message and
a service directly related to the communication of such a
message. The message must be oriented towards soliciting
business, attracting donations, or calling public
attention in the form of an information notice, political
announcement, or other similar communication.
By
publicizing companies'''''''' messages on the Internet
(i.e., placing advertisements on Web sites), the Web site
operators are supplying an advertising service to the
companies.
Example
12: On-line shopping portals
A
Web site operator hosts electronic catalogues of various
merchants on its servers. Shoppers can select products
from these catalogues and place orders on-line. The Web
site operator has no contractual relationship with the
shoppers, and merely transmits orders to the merchants,
who are responsible for accepting and filling them. The
merchants pay the Web site operator a commission based on
a percentage of the value of orders placed through the
site.
By
hosting the catalogues, the Web site operator is
communicating a message intended to solicit business for
the merchants. This is a supply of an advertising service.
Example
13: On-line auctions
A
Web site operator displays a vendor''''''''s items for
purchase by auction. On-line shoppers purchase items
directly from the owner of the items, rather than from the
operator. The vendor compensates the Web site operator
with a percentage of the sale price or a flat fee. The
vendor and on-line shoppers have only the incidental use
of the software to perform certain tasks in respect of the
transactions (e.g., payment processing), but are not
provided any rights to use the software.
The
supply by the Web site operator to the vendor is
considered to be a supply of a service. No rights in
property or for the use of property are supplied between
the operator and the vendor.
V.
Subscriptions to databases and Web sites
These
supplies typically involve a provider making digitized
content available to customers for search, retrieval and
use. They are generally characterized as supplies of
intangible personal property.
Example
14: Data retrieval
A
supplier makes a vast repository of information available
to customers for search and retrieval purposes. Customers
pay a fee which enables them to access the data and to
search and extract specific information from the
repository. In some instances, the supplier adds
significant value in terms of content (e.g., analysis of
raw data), but the resulting product is not prepared for a
specific customer and there is no obligation to keep the
contents confidential. Such products might include special
industry or investment reports, which are either sent
electronically to subscribers, or are made available for
purchase and download from an on-line catalogue or index.
The
supply to the customers is a supply of intangible personal
property. The supplier is providing customers with a right
to access and use the repository of information (i.e., a
product already in existence), as well as the software
programs required to search and retrieve information from
the repository. Although there may be human involvement in
maintaining the repository of information (e.g., by adding
content or raw data analysis), this is considered to be an
input to the supply as there is no human involvement on
the part of the supplier when a customer accesses and
retrieves information.
Example
15: Access to an interactive Web site
A
supplier makes a Web site featuring digitized content
available to subscribers, including information, music,
video, games, and activities, whether or not developed or
owned by the supplier. The subscribers pay a fixed
periodic fee for access to the site. The principal value
of the site to subscribers is interacting with the site
while on-line, as opposed to getting a product or services
from the site. The supplier also charges companies a fee
for placing their banner or pop-up ads on the site.
In
this example there are two separate supplies: the
provision of the right to access the content on the Web
site, and the placement of banner or pop-up ads.
The
subscribers'''''''' right to access the content on the Web
site is a supply of intangible personal property. In
essence it is a supply of a right to use software, and the
right to access other digitized content on the Web site.
Although a copy of a digitized product is not provided,
there is a supply of a right to view, access or use a
product while the customer is on-line. As in Example 14,
any human involvement occurs behind the scenes in
establishing and maintaining the Web site, but there is no
human involvement on the part of the supplier when
subscribers access the site and its digitized content.
The
placement by the supplier of the banner or pop-up ads on
its site is a supply of an advertising service, as in
Example 11.
VI.
Information provided by electronic means
These
supplies range from professional advisory services to the
periodic electronic delivery of data to subscribers in
accordance with their personal preferences. If the supply
is of an existing product or a product created for a group
of customers who receive rights to the product (e.g.,
subscriptions for data delivered on a periodic basis), it
is characterized as a supply of intangible personal
property. If there is human involvement in the making of
the supply, or specific work is performed by a person for
a specific customer, and the supply does not involve the
transfer of rights, it is characterized as a supply of a
service.
Example
16: Electronic access to professional advice (e.g.,
consulting)
A
consultant, lawyer, doctor or other professional service
provider advises clients through e-mail, video
conferencing, or other remote means of communication.
The
supply of the advice to clients, delivered by electronic
means, is a supply of a service, as it involves specific
work that is performed for a specific client, and does not
involve a supply of rights to an existing product.
Example
17: Undisclosed technical information
A
customer is provided with undisclosed technical
information concerning a product or process (e.g.,
narrative description and diagrams of a secret
manufacturing process).
If
the customer is provided with the right to use information
by way of licence, whether the information is in existence
or is developed specifically for the customer, the supply
is one of intangible personal property.
If
the supply is one of developing information for a specific
customer, and the customer owns the information, it is
characterized as a supply of a service.
Example
18: Information delivery
A
supplier delivers data electronically on a periodic basis
to subscribers (e.g., news clippings or stock market
quotations), in accordance with their personal
preferences. The principal value to the customers is the
convenience of receiving information in a customized
format tailored to their specific needs.
The
supply is one of a right to customized information. There
is no human involvement on the part of the supplier in the
making of the supply. Consequently, the supply is
characterized as one of intangible personal property.
Example
19: Content acquisition transactions
A
Web site operator pays various content providers for news
stories, information, and other on-line content to attract
users to a site. Alternatively, the Web site operator
might hire a content provider to create new content
specifically for the Web site.
This
could be characterized as either a supply of a service or
intangible personal property, depending upon the facts.
Where
the supply made by the content provider is of the right to
use copyrighted content, it is considered to be a supply
of intangible personal property, regardless of whether the
content is already in existence (e.g., it has already been
published), or it is developed specifically for the
customer. Where the content provider develops content
specifically for the Web site operator, and the Web site
operator owns the content, the supply is characterized as
a supply of a service.
Telecommunication
services
The
characterization of supplies made by electronic means
extends beyond determining whether a supply is intangible
personal property or a service, to determining whether a
supply may be a telecommunication service. The definition
of a telecommunication service in the Act is broad, and
because of the nature of electronic commerce, a number of
typical supplies made by electronic means are also
telecommunication services.
If
a supply is characterized as a telecommunication service
it is subject to special place of supply and zero-rating
rules for telecommunication services. These rules are
addressed in more detail in the other
"Telecommunication services" sections (Reference 1,
Reference 2, Reference 3).
For
GST/HST purposes, a "telecommunication service"
is defined in subsection 123(1) of the Act as:
(a)
the service of emitting, transmitting or receiving signs,
signals, writing, images or sounds or intelligence of any
nature by wire, cable, radio, optical or other
electromagnetic system, or by any similar technical
system, or
(b)
making available for such emission, transmission or
reception telecommunications facilities of a person who
carries on the business of supplying services referred to
in paragraph (a)
A
"telecommunications facility" is defined in
subsection 123(1) of the Act as:
any
facility, apparatus or other thing (including any wire,
cable, radio, optical or other electromagnetic system, or
any similar technical system, or any part thereof) that is
used or is capable of being used for telecommunications
Characterization
indicators
For
GST/HST purposes, it is important to distinguish between a
supply that is a supply of a telecommunication service,
and the use of telecommunications as a means by which
other property and services are supplied.
A
supply is generally considered to be a supply of a
telecommunication service where its predominant purpose is
to:
-
provide
for the emission, transmission or reception of signs,
signals, etc. (e.g., voice or data) through a
telecommunications network or similar technical
system;
-
make
available a telecommunications facility for the
emission, transmission or reception of signs, signals,
etc. through a telecommunications network or similar
technical system; or
-
provide
a means through which other services or intangible
personal property (e.g., content in a digitized
format) are delivered, rather than to provide the
services or intangible personal property.
A
supply is not generally a supply of a telecommunication
service where:
-
a
telecommunication service is used or consumed by the
supplier in making a supply of a service or property
(other than a telecommunication service);
-
it
includes the provision of a telecommunication service,
but only as a means of delivering another service or
property; or
-
it
is incidental to the supply of another service or
property.
Examples
In
the following examples the above-noted indicators are used
to determine whether the supplies in question are
characterized as telecommunication services.
Internet
access service
An
ISP is a company that provides users with Internet access,
for which they pay a fee. The connection is made by a
modem, which allows the user to send and receive data over
a telephone line. The telephone line is supplied to the
user by a third party telephone service provider. To
access the Internet, a user "calls" the ISP to
log on (if not already connected), and the user''''''''s
request for a particular Web site is routed to the server
hosting the desired data.
This
is a supply of a telecommunication service. The
predominant purpose of the service is to provide the
consumer with a connection, allowing the transmission and
reception of data over the Internet. Generally, this is
the predominant purpose of the service even where an ISP
provides content or access to content as part of its
service. The recipient is generally looking to the ISP to
supply the means by which access to the Internet is
obtained.
E-mail
A
company contracts with a vendor to provide e-mail
services. For a fee, the vendor will ensure that the
company''''''''s personnel can send and receive
intra-office and external e-mails. The vendor dedicates
space on a server for the composition, reception and
storage of e-mail messages sent to or by the company. The
company is provided with e-mail addresses (ID), a mailbox,
and the use of a network, thus allowing its employees to
send, receive and store information on a secure basis. The
company addresses its outgoing e-mail to a mail
recipient''''''''s e-mail address, and the mail is routed
to the server and forwarded to its final destination.
Incoming mail addressed to the company is routed to the
server and directed to a particular employee.
This
is a supply of a telecommunication service. The
predominant purpose of the service is to allow the company
to send and receive e-mail. The vendor is providing the
company with a service of transmitting text, images, etc.,
by means of its server and the use of a network.
Web
site hosting
A
company enters into an agreement with an ISP to provide
Web site hosting services for the company''''''''s Web
site. Under the agreement, the ISP is responsible for
housing the Web site on a server it owns and maintains,
which includes ensuring the security of the server and
that the Web site is accessible over the Internet. The
server is linked to the Internet through dedicated lines
acquired from a telephone service provider. The company is
responsible for the design and content of the Web site.
The agreement only addresses the Web site hosting
arrangements and does not deal with Internet access.
This
is not a supply of a telecommunication service. The
predominant purpose of the supply is the storage and
maintenance of the Web site on a server in a manner that
allows access to the Web site on the Internet. In making
the supply of this service the ISP uses or consumes a
number of inputs (e.g., telecommunication services,
hardware and software).
Internet
access services, e-mail and personal Web page
A
consumer pays a fee to an ISP for Internet access. In
addition to the Internet access, the consumer receives
e-mail services and space on the ISP''''''''s server to
create and maintain a personal Web page. The consumer
determines the content of the Web page, but it is hosted
on the ISP''''''''s server.
The
service provided by the ISP is a supply of a
telecommunication service. This is a typical transaction
between an ISP and an individual consumer. The ISP is
making a single supply which includes providing the
consumer with a connection to the Internet, an e-mail
account, and space on the ISP''''''''s server. The
predominant purpose of the supply to the consumer is the
Internet connection. As in the case of Internet access
services, the supply of a connection to the Internet is
considered to be a telecommunication service.
Voice
telephony services provided through the Internet
A
consumer pays a fee to a company for long distance
"telephone calls" made over the Internet. The
consumer is able to place these calls from his or her
computer or telephone any place in the world. The calls
are routed through the networks that make up the backbone
of the Internet.
This
is a supply of a telecommunication service. The
predominant purpose of the supply is to provide the
transmission of voice communication. The supplier of the
voice telephony is providing a traditional voice telephone
service, except that the service is being provided over
the Internet.
Electronic
Data Interchange (EDI) transmission of income tax returns
A
company is engaged by an approved EFILE tax preparer to
electronically file income tax returns for its clients.
The tax preparer completes all of the income tax returns
prior to submitting them to the company for electronic
transmission. Upon receipt of the returns, the company
validates the format of the returns, encrypts the data,
validates the values indicated in the tax return boxes
(e.g., SIN numbers), and electronically submits the
returns to the CCRA.
This
is a supply of a telecommunication service. The
predominant purpose of the supply is the electronic
transmission of data. The validation and encryption are
part of the service of transmitting the data.
Preparation
and EDI transmission of income tax returns
A
consumer pays a fee to a tax preparer to prepare and
electronically file his or her income tax return with the
CCRA. The tax preparer completes the income tax return,
validates the format and values, encrypts the data, and
electronically transmits the return to the CCRA.
This
is not a supply of a telecommunication service. The tax
preparer is making a single supply which comprises a
number of elements, including preparation of the tax
return and its transmission to the CCRA. The predominant
purpose of the supply is the preparation of the tax
return. Therefore, the supply is not a telecommunication
service.
Provision
of digitized products (e.g., film, video, music)
A
consumer selects and orders a digitized product from a
commercial supplier. For a fee, the digitized product is
available for downloading by the consumer.
This
is not a supply of a telecommunication service. The supply
of a digitized product that is readily available for
download over the Internet is the supply of intangible
personal property. In this instance, a telecommunication
service is used or consumed by the supplier in making the
supply of the digitized product.
Web-based
broadcasting
A
consumer pays a subscription fee for access to a Web site
with audio and/or visual content that is streamed (i.e.,
broadcast in real time) over the Internet. A copy of the
content is not provided to the consumer.
The
supply of the audio and/or visual content streamed over
the Internet is a telecommunication service. The
predominant purpose of the supply is to provide the
consumer with the broadcast content. This is analogous to
a traditional radio or television broadcasting service,
which is considered to be a telecommunication service for
GST/HST purposes.
Source
: IBLS
INTERNET LAW (subscription) - Irvine,CA,USA, dated
09/10/2007
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