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The HST Monster

Harmonization and its Discontents
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Jimmy went to the hardware store to buy himself a gasket. A dishwasher had broken back home and he needed the parts to fix it.

Walking into the store, he knew he'd be confronting a monster through the simple act of purchasing a product - the Provincial Sales Tax, or PST, which would add seven per cent to the cost of his purchase.

It was a rather discriminate creature, subsisting off the organs of the economy by latching on to certain purchases. In the hardware store it applied to just about every item except the candies at the counter.

But while Jimmy knew he'd be feeding this little monster through the tax on top of his purchase, he didn't know he'd actually be feeding it twice because the same tax had also burrowed itself into the shelf price of the products. Almost every item had been taxed twice.

To cover that cost each product in the store was priced three to four per cent higher. That helped the storeowner cover the PST he paid on the expenses he needed to keep the store running. That included his counter, light fixtures, computer and shelves.

Jimmy picked up a gasket from aisle three and walked to the cashier. The man at the till smirked as he approached. He paid $17.99 plus $2.15 in taxes on top of it. He also forked over another $0.72 - an extra four per cent hidden within the shelf price that he didn't even know he paid.

 

The coming of the HST

What's described above is a situation that the provincial government hopes to eradicate through implementation of the Harmonized Sales Tax (HST). Starting July 1 the HST will merge the rates of the GST and the PST into a single, recoverable, value-added tax (VAT) that will apply to almost all purchases. Businesses can recover the tax by charging it to consumers.

The B.C. Liberal government sells it as the "single biggest thing" that the province can adopt to stimulate its economy and almost no one is convinced. A petition to stop the tax has allegedly reached the threshold of 10 per cent of the voters in every riding it needs to prompt a review and, possibly, a referendum on its implementation.

Many worry about the expenses that will be added to many of their purchases; like any monster, they fear something they don't understand.

Real knowledge of the tax is generally confined to people with backgrounds in accounting, tax law and economics, at least if one wants to explain how the tax will be beneficial. There is a case to be made, but the complicated nature of the new tax system and the one it's succeeding make it difficult for the government to explain precisely how.

 

The GST

In the simplest terms, British Columbia subsists on a two-tiered tax system, administered at two levels of government.

One is the national Goods and Services Tax (GST), a five per cent, value-added tax (VAT) that applies to supplies of goods and services and has very few exemptions. The Government of Canada administers the tax under Part IX of the Excise Tax Act.

The other is the Provincial Sales Tax (PST), a seven per cent retail sales tax (RST) that taxes business inputs and consumption with several exemptions. The provincial government administers this tax under the Social Service Tax Act.

The GST applies a five per cent levy to all purchases but businesses can recover what they pay when they report the taxes they've collected on their returns.

Take, for example, a clothing retailer. In a given month it makes $1,000 in revenue, but the business also has to spend $500 on items like clothing racks, shelves, light fixtures, cash registers -  anything it needs to stay afloat.

Assume that the costs are $500 and all are GST applicable, as the Excise Tax Act permits a number of exemptions. The retailer thus owes the federal government $25.

Because the retailer has earned $1,000, he has collected $50 in GST from consumers. When he files his tax return at the end of the month, as businesses often do, he can mark down how much he collected, how much he owed, and then pay the feds the difference - in this case, $25.

He pays that money to the government and then keeps the remaining $25, effectively paying himself back the money he owes on his expenses. Without taking PST into account at this point he maintains a profit of $500.

 

PST

The PST works differently. Under Section 6 of the Social Service Tax Act, it is applied any time a purchaser buys something and it's not recoverable the way GST is.

It also differs from GST because it's a very discriminate tax. The Social Service Tax Act applies the PST only to "tangible personal property," meaning anything you can see, weigh, measure, feel or touch, or that is in any other way perceptible to the senses. That includes natural or manufactured gas, as well as software, electricity, fixtures and heat.

The PST also has a long list of exemptions, including candy, soft drinks, bicycles, aircraft and their associated parts, as well as raw materials that haven't yet been put through a chemical reaction or processed in any way. Those examples don't even scratch the surface of the exemptions afforded under the Act.

Let's go back to the example of the clothing retailer, same as above. He makes $1,000 in a given month and has $500 in expenses. Both the GST and PST apply to the company's costs.

Taking both of these systems into account, and assuming that none of the company's costs have exemptions under the Excise Tax Act or the Social Service Tax Act, the retailer owes $25 in GST and $35 in PST on his expenses.

He can recover that $25 through sales but the $35 goes straight to the provincial government. So, too, does any PST collected through sales, in this case $70 - he keeps none of it. He thus walks out of the month with a profit of $465.

 

The Taxman Cometh

The Harmonized Sales Tax (HST) is being applied to B.C.'s economy to simplify the tax system, eliminating double taxation and theoretically passing the savings along to businesses.

That's a bad thing for businesses if their products were not taxed before, like bicycles, restaurant meals and just about any professional service except for lawyers.

If taxes are monsters, then the HST is the big monster that ate the little PST monster. HST will slither through just about every organ of B.C.'s economy and gobble up tax revenue without prejudice. Comparatively the PST used to draw economic blood from only certain businesses and industries, and ignored others altogether.

The HST doesn't necessarily combine the GST and PST into one tax - it merely harmonizes their rates into a single, 12 per cent levy. It essentially adds seven per cent to the GST and eliminates PST altogether.

Once the Consumption Tax Rebate and Transition Act passes in the legislature, the Social Service Tax Act will be repealed and B.C.'s consumption taxes will be administered entirely by the federal government starting on July 1.

From there on in you'll pay a 12 per cent tax on just about everything, including most things that were exempt under the Social Service Tax Act. It won't apply to anything that already had an exemption from GST.

B.C.'s Ministry of Finance estimates that approximately 300 provincial employees who administered the PST in Victoria will now see their "responsibilities transferred" to the federal government, with the tax coming under the purview of the Canada Revenue Agency. Seven per cent of all HST revenue collected in B.C. will flow back to the province and the Province estimates it will save $30 million in administrative costs.

Whoever moves from Victoria to Ottawa will see their salary paid by the federal government, meaning whatever they were paid by B.C. taxpayers will now spread more evenly among Canadian taxpayers. A spokeswoman with the Ministry of Finance did not confirm whether PST employees in Victoria would actually move to Ottawa. She also didn't confirm whether they'd simply be laid off.

Criticisms of the tax revolve largely around the fact that consumers will be paying more for many items and that's true. A restaurant meal, for example, will cost 12 per cent more where before you only paid tax on alcoholic drinks. Owners of commercial property will be charged tax for buying the buildings they lease to other operators.

Buying a new home will cost you exponentially more but buyers will also get a partial HST rebate of up to $20,000 if it costs more than $400,000.

Other criticisms concern the manner in which the HST was brought forward. The narrative of the anti-HST movement states that the B.C. Liberals "lied and deceived" British Columbians when it announced the tax two months after winning re-election.

Colin Hansen, B.C.'s minister of finance, stated in an interview that the Province has been considering HST since before the Liberals were in government.

It reached the ears of provincial lawmakers as early as the mid-1990s, when the federal government was encouraging all provinces to do away with RST (Retail Sales Taxes) and implement a national VAT. The Province of Quebec adopted the Quebec Sales Tax in 1991, the same year that Canada adopted the national GST, while the Maritimes signed on to HST in 1997.

Two factors motivated B.C. to sign on to harmonization. First, the Province of Ontario announced on March 26, 2009 - just before the writ dropped for the 2009 provincial election in B.C. - that it would be adopting the harmonized tax. The B.C. Liberals wouldn't let themselves be outdone by a competitor.

Second, the federal government began to show some flexibility around the tax rate once Ontario decided to sign on. It initially wanted all provinces to adopt a flat, 13 per cent tax, which would have required British Columbia to raise its harmonized rate by one per cent. That was no longer necessary.

"For Ontario to be in a VAT system and B.C. not to be there at a time when there is a lot of investment dollars flowing in the world economy, we would be at a disadvantage," Hansen said in an interview.

With the election over, ministry staff began to show him more information about the HST. Intrigued, he began discussing the idea with staff, then approached Premier Gordon Campbell with the recommendation that the government consider implementing it.

He got cabinet's blessing for discussions with Ottawa and started talking HST with the federal government in early June. They offered $1.6 billion in transitional funding, a reward for "increasing business competitiveness," and the Province announced the tax in late July.

Hansen vehemently disputes the assertion of the anti-HST forces that the government lied about bringing it in during the election. Before the election the Greater Vancouver Home Builders' Association was watching Ontario with interest. They saw that it was bringing in HST and wondered if B.C. would do the same.

The Association distributed a questionnaire to all Liberal MLA's asking whether the party would "promote HST." None responded individually but the party offered a response. It said that "HST is not contemplated in the B.C. Liberal platform," though they also defended the PST system by pointing out its myriad exemptions.

"Other than that, the issue never came up," Hansen said. "The Premier was never asked about it, the media never raised it, the NDP never raised it, it never came up during the debates."

Meanwhile the Ministry of Finance disputes the assertion that the tax will be "revenue neutral," as is often claimed. The tax will be revenue neutral in its first year, meaning that it's not expected to bring in any more money than the PST did before.

After that, however, it is possible that the provincial government will pull in more revenue under HST than it did under the previous system, but all of that has already been promised to health care, as per the most recent provincial budget.

 

The HST Explained

Here's how the HST will apply. Look back to the example of the retailer. He makes $1,000 in a month but also has $500 in expenses. Under the current system he pays $25 in GST and $35 in PST on those expenses and he can never recover the latter through his tax return.

The retailer will now pay $60 in HST on his expenses, which is 12 per cent of $500. If he makes $1,000 he'll also collect $120 in HST from consumers. At the end of the month he files his tax return, marking down $120 as HST collectable and $60 as the HST he owes on his expenses. In the end he still pays $60 to the government but gets that money back from his customers.

His profit at the end of the month remains $500, while under PST it was $465.

Take a slightly bigger example - say, a computer retailer who makes $10,000 in a month. The owner spends $9,000 on expenses like cash registers, light fixtures, displays, not to mention the products being sold in the store.

Under GST and PST he owes $450 on the former and $630 on the latter - a total of $1,080 in taxes and he can't recover the PST through his tax return.

Under HST he still owes the same amount in taxes but he's able to recover it if enough people have bought his products. If he makes $10,000 in a month, he's collected $1,200 in HST. At the end of that month he can file a tax return showing $1,200 in HST collected and $1,080 in HST he owes on his expenses. He can thus pay himself back through his expenses and maintain a profit of $1,000, whereas under the current system his profit is $370.

Finally, let's look at an example of a less successful businessperson, again a computer retailer that buys a big, fancy machine for the store. The business has made $10,000 in sales and collected $1,200 in HST. Then the owner buys the machine for $20,000. The expenses now exceed revenues.

The end of the month comes around and the retailer has to fill out a tax return. He marks down that he collected $1,200 in HST but he also owes $2,400 in HST on his new machine. He fills out the return with those figures and the federal government sends him a cheque for $1,200 - the difference between what he owes and what he's collected.

If he carries on like this he's going out of business but for the time being HST has given him a bit of tax relief. Under the current system he still has to pay PST and will never see that money again.

Again, the biggest difference is that businesses can't file tax returns for PST. They owe to the government whatever tax they've paid on top of their expenses, as well as anything they've collected from customers.

 

Why lawyers think HST is better

The profit-eating capabilities of PST have made an HST champion out of David Douglas Robertson, a tax lawyer and partner with Fasken Martineau in Vancouver. He's been studying tax harmonization since at least 2005, when he penned a report titled "Sales Tax Harmonization: The Facts and Nothing but the Facts" for a meeting of the Canadian Institute of Chartered Accountants (CICA).

In it he argues for a single, value-added tax system in B.C. by way of comparison. He asks why PST applies to CDs when it doesn't apply to MP3s. He asks why tax lawyers must be charged PST when accountants can provide tax policy advice PST-free. He asks why repairs to a stand-alone dishwasher result in PST when the tax isn't charged for the built-in variety.

All of these conundrums are the result of the Social Service Tax Act, which only applies the Provincial Sales Tax to "tangible personal property," exempting all services such as gym passes, lift tickets, consulting services or any product you can't necessarily see, measure or touch. Legal services are the only professional offerings that can be charged PST under the Act.

As Robertson tells it, implementing HST could make B.C. a more attractive place for investment and help it compete internationally.

"If you're a hardware store or hardware distributor and you want to sell your goods to China or down to the United States, because of the tax that's included in the capital cost to your goods, you have to increase your selling price globally," he said in an interview.

Robertson's report argues that HST is a simpler, more equal and neutral tax than the PST. It's a tax burden shared by all taxpayers because it applies to all forms of property, whether real, tangible or intangible. The PST, by extension, favours certain businesses and industries because it only applies to "tangible" property and has a host of exemptions.

Those exemptions include soft drinks; candy; used clothing and footwear (if the purchase price is less than $100); smoke alarms that cost less than $250; and any tangible property purchased by a "bona fide" farmer. Therefore if a provincially-approved "bona fide" farmer wanted to buy a hoe he could get it PST-free.

Asked how B.C. ended up with so many exemptions in the Social Service Tax Act, Colin Hansen said it's because the government receives "hundreds of ideas" every year for items that should be made tax-free. He denied that it's because some industries have better lobbyists than others.

Robertson didn't.

"The exemptions you see are all political," he said. "There's exemptions for safety equipment, fire extinguishers and smoke detectors.

"Yes, we want to encourage people to be safe and have a smoke detector, but there's lots of things people want to have in their house, like the furnace to keep them warm. I think people need heat more than safety equipment."

One of the bigger problems with PST, according to Robertson, is that it forces businesses to include an additional three to four per cent in the selling price. Something that costs $3.99 before tax already has more PST built into it, on the order of three to four per cent.

Without PST, businesses won't have to charge that and, said Robertson, that will allow prices to go down in such a way that consumers will instead be paying higher tax on lower prices.

That's been a difficult selling point for the Harmonized Sales Tax: the idea that businesses could actually bring their prices down at the base level. Robertson is adamant that it will happen because that was precisely the experience of Atlantic Canada when they brought in a harmonized tax, according to a study by the C.D. Howe Institute.

"Consumer prices, following harmonization, have a tendency to go down," he said. "It takes eight months but you see consumer prices drop following harmonization, because you see taxes come off the business inputs."

Robertson also denies that he opposes PST because his is the only professional service subject to it in B.C. His actual reason is that he knows a client who wants to set down roots in Western Canada with a $20 million investment that could create 80 full-time jobs.

The client can choose between Vancouver and Calgary - and with PST a thing of the past, Robertson said he'll be able to convince his clients to locate on the West Coast.

 

The Detractors

More vocal than HST's supporters have been its detractors, industries like food services and tourism that make up the bulk of Whistler's economy. Restaurants could feel a hit once HST applies to meals.

For a while that meant booze would be cheaper because the sales tax was being removed but the Liquor Distribution Branch has since corrected that by increasing its markup on alcohol so that prices at liquor stores remain the same.

Fight HST, a persistent campaign against the Harmonized Sales Tax, has capitalized on the anger of consumers and businesses who balk at seeing an extra seven per cent applied to purchases that were exempt from PST before.

The public face of this movement is Wilhelmus Nicholaas Theodore Marie "Bill" Vander Zalm, the 28 th premier of British Columbia with the Social Credit Party. He's best remembered for a flashy 1986 election campaign in which he offered no platform and didn't show up for any debates. At the time the NDP were his main opposition and the Liberals hadn't even elected a member to the legislature.

He was recognized by his catchphrase "Faaaaantastic" and resigned in disgrace when a conflict of interest report stated that he had mixed private business with his public duties in the sale of his Fantasy Garden World theme park. He hadn't done anything illegal but he resigned all the same, succeeded in the premier's chair by Rita Johnston before the party walked out of existence in the 1991 election.

He has since tried unsuccessfully for public office again but spent much of his post-political life as a developer, responsible for a condo development in Qualicum Beach that has never sold out and a gated community in Merritt that has yet to see the light of day.

"It's going to be a first-class community but right now might not be the best time to start it," he said, owing to the economy.

He and lieutenant Chris Delaney, a member of the B.C. Conservative Party, have mounted a petition to repeal the HST that hit its deadline for signatures on May 5.

It's an odd position for Delaney to take. He was a candidate in the Penticton riding in the 2009 provincial election and ran on a platform that actually encouraged tax harmonization. Point five of the party platform stated that the BC Conservatives would "aggressively investigate" the benefits of harmonizing the PST with the GST, saying that businesses were "overburdened" with collection of various taxes for government.

The platform also states that it would vote to eliminate the BC Property Transfer Tax, which was introduced while Vander Zalm was Premier. It levies a one per cent tax on the first $200,000 of a home when it transfers ownership. It then levies two per cent on any portion of the value greater than $200,000.

The two have nevertheless become stewards of what appears to be a very successful campaign against the HST. Fight HST claims it has already gathered the 10 per cent needed in each electoral district for government review under B.C.'s Recall and Initiative Act - also legislation introduced while Vander Zalm was Premier.

The campaign, which has held rallies throughout the Province, made its way to Pemberton's old gymnasium on May 8, where a "No to HST" sign was perched on the hood of a Honda S-2000 convertible that belonged to a rally organizer. Inside, Vander Zalm charmed an amenable crowd of 40 into signing the petition.

"It's a beautiful summer day last July and I guess everybody was out on the beach, cutting the grass, sitting on the patio," he said, despite the fact it rained on the day in question.

"I had just finished dinner, I said to (wife) Lillian, I'm just going to watch the news for a while.

"There was a quick announcement by the announcer, 'The Government of Canada has reached agreement with the Government of B.C. to have B.C. adopt and accept the HST.' I said, 'Lillian, this is crazy! Every government has turned this down since the time of Bill Bennett!'"

Vander Zalm said he "tossed and turned" that night thinking about this "dumb thing." He turned on the news the next day and saw no one talking about what he saw was a huge story.

"I'm telling Lillian, it's all that liberal media," he told his crowd, seemingly joking.

Lillian convinced him to write an open letter opposing the tax. He did, and a Province reporter phoned him up to do a story. To his surprise it landed on the paper's front page.

"So the next morning I look at the newspaper, front page picture, inside full coverage about the HST," he said. "I said Lillian, I can't believe it! It's accurate! I've never seen this before!"

The article triggered a storm of responses: over 800 e-mails and most of them saying friendly things. Supporters became volunteers and soon he had 7,000 mounting an official petition to repeal the HST.

He told his audience in Pemberton that the HST could lead to an underground economy, just like in Greece. The high cost of services would force contractors to seek work under the table. Services like lawnmowing, tree pruning, even some plumbing and electrical work would come on the fly.

The economy would especially suffer in the Sea to Sky region, according to Vander Zalm.

"Taxes don't bring prices down, taxes don't create economic activity," he said. "Take a community like Pemberton or Whistler. All these communities, particularly if you're in the restaurant business, any business or anything beyond the regular everyday needs is going to suffer."

Delaney explained at the Pemberton rally that the aim of the petition is threefold: cancel the agreement between the Government of Canada and British Columbia that establishes HST; restore the PST; and then refund any revenues collected under HST.

If all the signatures are collected and legitimate, the petition will go to a Select Standing Committee of the legislature that will study the petition, then produce a report recommending for or against a referendum.

It can either go to the committee or B.C.'s Chief Electoral Officer - a position that will be vacant once the petition reaches its deadline on July 5.

Should that step not produce a referendum, the Fight HST movement has designs on a coup d'etat. They will attempt to recall the Premier in his own riding.

"If they were to vote down our bill, the first petition ever to reach the Province, first off they'd be committing political suicide," Delaney said. "We have the backup which is recall, and recall can begin in November.

"That's the strategy, and I say the Premier because we don't know what the (Liberals) will do with this guy."

The zeal being shown against HST doesn't necessarily mean that the movement's leaders agree with the status quo. Delaney said at the Pemberton rally that he had so much fun drafting up the petition that he thought he might try to repeal the PST... but he hasn't gone that far.

Vander Zalm, too, recognizes that the PST has issues but he still feels the HST is worse.

"We have no choice but to carry on with the PST until they find something different," he said. "I'm not suggesting the PST is a good thing, when I was in government we worked to reduce the PST because we recognized it was an unfair tax. But until we get something else, we're stuck with the PST."

In Whistler, an economy driven almost completely by service and tourism, opinions are mixed but few seem enthused by the tax.

Dave Brownlie, CEO of Whistler Blackcomb, said in an email that no good will come to the company from HST. Prices on services like lift passes and rentals will all go up, to say nothing of restaurant services at restaurants like the Rendezvous and the Roundhouse.

The Whistler Chamber of Commerce aligns itself to a large degree with its provincial equivalent, supporting the tax because they feel it could stimulate the economy by removing taxes on business inputs. However, it also recognizes that HST shifts tax burdens from businesses to end consumers.

Sue Adams, co-owner of the Grocery Store, doesn't feel the tax will have much impact on her business because groceries are already exempt from GST. Little items like snack bags of chips, however, as well as single muffins and candies will feel the burn from the HST. The only thing that concerns Adams is the confusion that could arrive at the tills on July 1.

Mike Walsh of Walsh Restoration Services also doesn't feel there will be much impact on his business. He was most enthusiastic about the HST of any business owners contacted for this feature.

"I've just come from England where there's a 17 per cent value added," he said. "I think 12 per cent is a bargain."

 

Conclusion

July 1 approaches and the B.C. Liberals are hedging their future on a tax that many revile and few understand.

They're floundering in the polls and despite months of criticism they're holding fast to their decision, believing it's the best way to keep the Province's economy competitive.

July 5 also approaches and a Select Standing Committee that has apparently only met once in two decades will hold political napalm in its hands. If it recommends a referendum it may lose HST altogether. If it recommends against one, the Liberals are betting their future on any economic benefits the tax may bring before 2013.

The government's rigidity in the face of public discord is a sign of how serious it is about implementing the new system. Its grassroots opposition is a testament to how right they better be if they want to survive another election.

 

 




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