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BC's Harmonized Sales Tax Will Hit Some Consumers Hard

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From Dining Out to Getting a Haircut, British Columbians Will Pay More.
 
THE VANCOUVER SUN, July 23, 2009 — Consumers will likely be paying more at restaurants and for services such as haircuts and accounting when B.C. adopts a harmonized sales tax next July.
 

Under the harmonized tax regime, announced Thursday by the provincial government, the five-per-cent federal goods and services tax will be combined with the province’s seven-per-cent provincial sales tax into a 12-per-cent harmonized tax.

 

The added costs to consumers will come from the fact the new tax will apply to the same goods and services that the GST applies to, and that includes many items that were not subject to PST.

For example, restaurant meals, excluding alcohol, have not been subject to PST, but will be subject to the new HST. So, too, will the purchase of such things as bicycles, school supplies and non-prescription medicines.

 
The news is especially grim for the restaurant industry, which is already seeing business down because of the drop in tourism, said Mark von Schellwitz, regional vice-president for the Canadian Restaurant and Foodservices Association. Restaurants currently charge GST on the full meal, including alcohol, but provincial tax on the alcohol only. So the HST will add seven per cent to the cost of the food portion of the meal. History has shown that a seven-per-cent price increase translates into a seven-per-cent loss in sales, von Schellwitz said. “That’s going to cost our industry in B.C. annually $750 million,” he said.
 
In theory, a harmonized tax lowers the cost of doing business by allowing companies to deduct the tax they pay on inputs, as they currently do with GST. The provincial government estimated this would save businesses $1.9 billion. Those savings would theoretically be passed on to consumers. But the major cost for restaurants is food, which is GST-exempt, von Schellwitz said. So there are few savings to pass on. Businesses that pay substantial amounts of provincial sales tax on inputs will see their costs go down and may lower prices, said Janice Roper, a partner at Deloitte. Then the tax on the good or service would push the price back up. But overall, “one would think that in most cases the prices [including the new tax] will go up,” Roper said.
 
In many of the previously PST-exempt products, like services such as accounting and hairdressing, there won’t be extensive input credits that would lower costs, Roper said.
 
To date, more than 130 countries in the world, and four other provinces in Canada, have adopted value-added taxes with input credits deductible. Ontario is poised to do so at the same time as B.C.

So the new tax will “put our businesses on a level playing field with their international competitors,” Premier Gordon Campbell told reporters when announcing the adoption of the HST.

 

“We do believe when our industries are on a level playing field they compete better and they win more,” Campbell said. “And that makes B.C. stronger.”

 

The federal government will provide $1.6 billion to the province for adopting the new harmonized tax, money that will “help with our fiscal challenges,” the premier said. Earlier this month, the government announced that it expected this year’s deficit would be greater than the $495 million originally forecast.

The B.C. Business Council was one of the many organizations that lobbied for a harmonized tax.

“We think it’s going to be very good for the provincial economy over the long term,” the council’s executive vice-president of policy, Jock Finlayson, said in a voice-mail message.

 

The harmonized tax should attract new investment into the province and lead to higher productivity and higher wages, Finlayson said. And that will be good for the province. “It does represent a net shift of the consumption tax burden from intermediate production onto final consumption,” Finlayson said. “But after all, that’s what a consumption tax is supposed to do.”

 
Members of the Canadian Federation of Independent Business are split on the tax, Brian Bonney, the director of provincial affairs in B.C., said in an interview. On the plus side will be the reduction of paperwork and the ability to deduct input credits, which will both have a “massive” impact on small businesses, he said. But businesses such as restaurants, which sell products that are currently PST-exempt but won’t be HST exempt, could be adversely affected. “Overall, this is a positive thing,” Bonney said. “But I think there are definitely some sectors in the economy that are not going to be happy with this announcement.”
 
Under its deal with the federal government, B.C. has maintained the ability to exempt some but not all products that are currently PST-exempt through a point-of-sale rebate. Gasoline, for one, will not be subject to the higher HST. And buyers of new homes will receive a partial rebate up to a maximum of $20,000.
 
Basic groceries, books and children’s clothing will remain exempt.
Finance Minister Colin Hansen said moving to a harmonized tax would be revenue-neutral for the province, with tax revenues falling slightly in the first year and then rebounding to “a net positive to a limited extent.”
 
What Gets Taxed: PST-Exempt Goods and Services to be Subject to B.C.’s Harmonized Sales Tax

The following goods and services are currently exempt from provincial sales tax (PST), but will be subject to the full 12-per-cent harmonized sales tax when it is implemented next July. With the new HST, businesses will be able to recover the PST portion of the tax they currently pay, rather than passing it on to consumers as part of the price of these items. Theoretically, that should mean that prices for these goods will come down by seven per cent as they become subject to the full tax.

 
GOODS

• Residential fuels (electricity, natural gas) and heating.

• Basic cable TV and residential phones.

• All food products (only basic groceries will remain exempt under new tax).

• Non-prescription medication.

• Vitamins and dietary supplements.

• Bicycles.

• School supplies (books will continue to be exempt).

• Magazines and newspapers.

• Work-related safety equipment.

• Safety helmets, life jackets, first-aid kits.

• Smoke detectors and fire extinguishers.

• Energy conservation equipment (e.g., insulation, solar power equipment).

 

SERVICES

• Personal services such as hair care.

• Dry cleaning.

• Repair services for household appliances.

• Household maintenance such as renovations and painting.

• Real estate fees.

• Membership fees for health clubs.

• Movie and theatre tickets.

• Funeral services.

• Professional services such as accounting and home care.

• Airline fares within Canada.
 

Source: B.C. Ministry of Finance

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