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Managing the Harmonized Sales Tax - What Businesses Need to Consider

16/06/2010


In an effort to achieve greater efficiencies, the province of British Columbia is harmonizing their sales tax with the Federal Goods and Services Tax (GST). While the province touts the benefits of combining the taxes, such as reducing compliance costs and attracting new investment and jobs, there are some specific issues that impact both consumers and businesses.

Many products and services in BC are subject to both the GST and the PST, for a combined tax rate of 12%. After July 1, 2010 all goods and services subject to GST will be subject to HST of 12%. The HST will be a much broader based tax than the current PST is. Currently many businesses are able to purchase inventory and certain equipment used in specialized sectors exempt of PST. After July 1, 2010, these purchases will be subject to HST. Businesses looking at major expansions will also want to consider the impact of purchasing goods and materials before July 1, 2010 and the impact of making these purchases after July 1, 2010. Retail businesses will also have to understand how to handle sales returns and exchanges after July 1, 2010. Here’s a closer look at these two important considerations.

Purchasing Inventory and Expansions of a Business
After July 1, 2010, businesses will be required to pay HST on their inventory purchases. By reviewing their contracts and talking with their suppliers, they will have a better understanding of the cash flow impact this will have on the business. It may also be beneficial for businesses to talk with their banks to discuss financing arrangements to help with the cash flow impact.

Major purchases should be reviewed to determine whether if purchased before July 1, 2010 they would be subject to PST. If so the PST will become a cost of the product as it can’t be recovered.  Businesses may want to do a cost benefit analysis before making a major purchase to determine whether it makes sense to purchase before July 1, 2010 or after.

Sales Returns & Exchanges
As a business owner, you will likely encounter returns or exchanges before and after July 1, 2010. Updating your computer systems and other point-of sales systems with correct tax tables is going to be vital before July 1, 2010.  You will also want to test the system before May 1, 2010, to ensure you work out the kinks as a result of system changes. Here is a summary on how to handle returns or exchanges when goods are purchased before July 1, 2010 and returned after July 1, 2010 (and before November 2010).

  • If a return of goods occurs and a cash refund is given to a customer, the PST would be refunded.
  • If an exchange does not result in either a refund or an additional payment, there would be no PST refund, and the 7% provincial component of the HST would not be payable.
  • If there is a partial refund as a result of an exchange, the customer is able to recover the PST applicable to the amount refunded. The provincial component of the HST at 7% is not payable by the customer.
  • If an exchange results in additional payment by the customer, PST would not be applicable, however HST would apply on the additional payment.
  • If goods are returned after November 1, 2010, there will be no PST adjustments available at the point of sale. The purchaser however will be able to make an application for a refund of the PST for tax paid in error with the B.C. Ministry of Finance.

If PST did not apply on a purchase before July 1, 2010 and it is exchanged on or after July 1, 2010, HST will be applicable on the full value of the replacement property, unless the property is exempt from the provincial portion of HST; such as children’s clothing.

The rules surrounding the HST transition are complex. That’s why it’s important to work with a professional who can help you understand the rules, set up the proper systems, and take advantage of all the tax savings. By working closely with you, an indirect tax specialist can perform a diagnostic analysis, establish priorities for necessary systems, process changes and help you minimize cost and cash-flow impacts.

For more information, contact Heather Weber, MNP Indirect Tax Leader at 250.763.8919 or visit the MNP Library for further reading on the HST.