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Business Braced For Sales Tax Chaos In BC

September 2011 - Tax & Private Client. Legal Developments by Hassans.

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British Columbia's decision to scrap the harmonized sales tax (HST) system has provoked a mixed reaction from the business community, but opinion is largely unanimous that businesses and the government alike must think about making the transition back to the provincial and general sales tax regime as smooth as possible.

The Canadian province currently operates an HST system, under which the 7% provincial sales tax (PST) and the 5% federal general sales tax (GST) are blended to create an overall HST rate of 12%. The HST regime was introduced last year and a long and frequently bitter campaign to have it revoked reached its height during the recent referendum to decide the tax's future. The referendum - the results of which were announced on August 26 - resulted in a 54.73% majority for those wishing to reintroduce the PST/GST.

According to Finance Minister Kevin Falcon the 12% PST/GST will be duly reinstated. The transition period is expected to take at least 18 months, and British Columbia will have to repay a CAD1.6bn transition payment provided by the federal government when the HST was first introduced.

The overriding reaction to the results is an awareness that businesses will need to prepare for the impact of the transition. As summed up by KPMG, businesses need to begin thinking about the system changes they will be required to make, and will need to assess the overall financial effect of the reintroduction of the PST/GST. Jock Finlayson, Executive Vice President of the Business Council of British Columbia added that "businesses and the government will face direct and indirect costs and lost revenues in the billions of dollars as the province shifts back" to the old system.

There is understandably a great deal of disappointment among those who fought against the reinstatement of the PST/GST. One issue raised is that of British Columbia's competitiveness and the damage the uncertainty of a transitional sales tax regime will cause. Finlayson regards the PST/GST as an "inefficient and cumbersome retail sales tax", and said that the decision "poses a risk to the province's reputation as a stable jurisdiction in which to do business". In addition, the construction industry in particular is fearful of the impact on job creation, where the HST was seen as beneficial to bolstering employment.

On the other hand, those representing the restaurant industry expressed relief that the debate over the HST has at last drawn to a close. Mark von Schellwitz, Western Canada Vice President of the Canadian Restaurant and Foodservices Association said that adding the 7% provincial tax to all restaurant food had created an unlevel playing field, adding that his members welcomed the return of "certainty and food tax fairness".

According to Falcon's ministry, the government has established an action plan to guide the transition process back to the PST/GST regime. Falcon has also clarified that: "We will work as quickly as we responsibly can to return to the PST. We have always been clear that, as the independent panel found, dismantling the B.C. HST and returning to the PST will take time to do properly. I can assure British Columbians PST will not be applied to such items as restaurant meals, haircuts, bikes and gym memberships ? just as it was before the HST was introduced in B.C.

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