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Potential Benefits of the Harmonized Sales Tax for the Forestry Sector

04/02/2010


As many of you know, on July 1, 2010 the province of British Columbia will harmonize their sales tax. Harmonization brings many advantages and some disadvantages for the forestry sector. Our previous article focused on some of the challenges the HST will impose on businesses, while this article will present some of the benefits that harmonization offers.

To re-cap, the proposed rate of harmonization will be 12% which is made up of the 5% Goods and Services Tax (“GST”) and the 7% HST. The HST is designed to replace the British Columbia Social Services Tax (“PST”) which was imposed on “consumers” of goods and certain services in the province of British Columbia.

Since the PST was a tax imposed on most forestry businesses for the consumption of specific services and items, the PST became a very real cost of doing business. This cost was actually buried at each stage of the business cycle and more times than not, resulted in the PST being applied again, when it was already imbedded in the cost.

A quick example may be the best way to illustrate this situation. Let’s consider the process of logs being turned into paper. The various stages of the process would include:

  1. The physical logging of the timber.
  2. The movement of the timber/logs to a processing facility.
  3. The physical processing of the logs into pulp/paper.
  4. Warehousing and distribution of the paper to retail.
  5. Retail sale of paper to consumer.

In each of these stages, there would have been PST paid by the business on their overhead costs for heat, power, telecommunications and the capital equipment to perform the work needed to produce the paper.

As you can see, the PST would be added to the cost at each of the above stages on the goods (and potentially some services) consumed by each business which is then added to the cost at the next level of business and so on. The HST eliminates all of this “cascading” of tax, allowing businesses to be competitive without a hidden tax burden.

Real Cost Savings

Whenever a company is forced to pay tax and it becomes part of the cost of doing business, it stresses the operations, especially cash flow.

If we look at the purchase of a large piece of capital equipment (such as harvesting or trucking equipment) the PST becomes a buried cost of the acquisition. This means that the business has to look at an additional capital investment of 7%. The additional capital investment exacts further costs - in the form of bank financing and a lost opportunity cost for your capital. So, in addition to having to recover the cost of the PST on the purchase, the business will need to recover the incremental financing costs as well.

However, with the HST, the tax burden is lifted which essentially frees up 7% more working capital for businesses. This results in cost savings over and above the actual cost of the tax.

A third major advantage is the savings associated with the inherent complexities that were very much a part of the PST. All businesses were continually faced with a challenge of whether or not a purchase should be acquired with or without the PST. Once the decision was made, businesses were faced with the challenge of keeping track of the purchase to ensure that the use was not changed resulting in either a PST tax liability or a possible recovery of the tax.

The amount of time and staff required in the areas of purchasing and inventory through to the accounts payable and reporting functions consumed a large amount of manpower in various organizations. All of this time and effort comes at a considerable cost. Under the proposed HST, these types of issues will be reduced significantly as the rules will be virtually identical to the GST. Through the consistent treatment of all transactions under the HST, employees will spend less time tracking and reporting which will translate into substantial savings for businesses.

A fourth area of savings also comes from simplifying the sales tax process. Savings will result from reduced compliance costs. The fact that the HST will now be administered by the Federal Government means businesses will only have to deal with one reporting requirement. They will only have to address the issues raised by one revenue authority and not two as in the past. This transition to deal with one revenue authority will simplify audit processes, allow businesses to streamline financial and information reporting systems and help conserve precious resources such as time, capital and manpower.

All of these subtle yet significant changes will reduce the overhead burden that is carried by many businesses in the forestry sector. With lower costs, capital can be redeployed into more productive streams of the operation instead of the burden of government tax compliance.

Although there has been some negative and harsh criticism of the HST, there are some very significant changes coming that will actually help reduce costs that businesses are paying in B.C. Ultimately these cost savings will allow businesses and industries to become much more competitive in national and international markets.

Summary

There are a number of potential cost saving measures that the HST offers. In this article, we highlight a few of these benefits which include:

  1. The biggest savings is the removal of the cascading effect of the antiquated PST that is imbedded and passed from business to business.
  2. Another significant savings is the reduction in capital that is tied up in the 7% PST when making capital acquisitions. This 7% savings of PST will now be available to businesses for redeployment to fund further growth or repay debt, making business and industries more competitive.
  3. Reduced burden to staff who must track, monitor and file returns related to the PST. The whole aspect of tracking exempt purchases, taxable purchases, the change of use from exempt to taxable and the monthly reporting will no longer be necessary with the HST. This translates into time savings and a significant reduction in costs.
  4. The other advantage outlined here offers cost savings and peace of mind to business owners. By dealing with one revenue authority you are able to cut your filing, audit and compliance costs associated with commodity taxes in half. Since you only have one authority that will contact you and conduct audits, you’ll also save yourself time. Reporting to one authority is much easier than two, sparing you from all the preparation work and stress that surrounds those events.

Initially, transitioning from the current methods and processes to the new will be quite challenging. But, after the first 12 months pass, you will start to see and realize some of the advantages of using one sales tax system.

For more information regarding the HST in the Forestry sector contact Mitch LaBuick, MNP’s Senior Manager Commodity Tax at 780.451.4406.