August 3, 2009

Harmonized Sales Tax

B.C. construction industry gives HST mixed reviews

RICHARD GILBERT

staff writer

B.C.’s new harmonized sales tax could deliver major benefits to the construction industry, but some are concerned it will have a negative impact.

“This is an essential step to make our businesses more competitive, encourage billions of dollars in new investment, lower costs on productivity and reduce administrative costs to B.C. taxpayers and businesses,” said Premier Gordon Campbell after announcing the plan.

“Most importantly, this will create jobs and generate long-term economic growth that will in turn generate more revenue to sustain and improve crucial public services.”

The government plans to harmonize the seven per cent provincial sales tax (PST) with the five per cent federal Goods and Services Tax (GST) effective July 1, 2010.

The HST will be a single tax at 12 per cent, which the government argues will remove input costs for construction and other businesses.

The B.C. government estimates the HST will remove more than $2 billion in costs for businesses.

It estimates that the construction industry will benefit from the removal of about $880 million in sales tax.

Under the current taxation system, PST is paid on every part or component at every stage in the production process.

For example, the manufacturer of a bucket for a front end loader pays PST on steel, welding rods, bearings, hydraulics and all other parts.

When the manufacturer sells the bucket to a dealer, PST is paid on the final price. PST is then paid again, when the dealer puts the plough or bucket on a machine and sells it to a customer.

Under the new taxation system, the manufacturer can claim back the HST at every stage in the production process. HST will only be paid on the final product by the end user.

Heavy equipment dealers, who were hit hard by the current recession, are concerned about the impact of the HST implementation on their businesses.

“The HST may make it tough for us to sell to contractors because they may want to wait until it is in place,” said Blair Gourlay, operations manager with SMS Equipment.

“If a benefit is to be had, customers will want to wait to realize that benefit.”

Jack Davidson, president of the B.C. Road Builders and Heavy Construction Association, agreed that contractors may wait to make purchases.

“Equipment dealers will have to figure out how to accommodate their customers’ ability to qualify for tax credits and get innovative in their terms of sale,” said Davidson.

“A lease to own contract is an example of something that could help in the interim period.”

Another issue is whether or not larger companies will be able to deduct the HST paid on input cost during production.

“One area we will be working with government on is the proposed delay in the provision of input tax credits for certain purchases by businesses with taxable sales over $10 million,” said Davidson.

“If certain purchases includes heavy equipment purchases, this will have a negative impact on equipment dealers, who have already been deeply affected by the downturn in the world economy.”

Home builders in B.C. are also concerned the new HST may have a detrimental impact.

The tax is expected to add about $15,000 to the cost of a $500,000 home.

“The last thing we need right now is another impediment to homebuyers,” said Peter Simpson, CEO of the Greater Vancouver Homebuilders Association (GVHA).

He is worried the HST will reduce the affordability of homes for the new buyers.

The provincial sales tax for new housing is currently embedded in the cost of some construction materials.

The imbedded tax is about 2.4 per cent of the cost of the home, but no PST or GST is charged.

Under the HST, an additional tax is applied, to a five per cent base, on a sliding scale starting at two per cent on a $400,000 home and moving up to five per cent on a $1 million home.

However, up to five per cent of the new tax is eligible for a rebate.

Simpson is concerned because the output of new homes is about 50 per cent of what it was last year at this time.

On July 24, Simpson was invited to a meeting with Finance Minister Colin Hansen and Premier Gordon Campbell to discuss potential problems with the HST.

“Apart from GVHBA, CHBA-BC (Canadian Home Builders Association-B.C.), UDI (Urban Development Institute) and the restaurant association, it was a love-in as most industry sectors present were high-fiving each other and congratulating the provincial government on its HST initiative,” he said.

“We expressed concerns with a number of harmonization impacts, including transition rules, indexation and tax neutrality.”

The homebuilders wanted the HST to be tax neutral, but this option was rejected by the premier.

The new tax will also add five per cent onto the labour component renovations, which brings the total tax up to 10 per cent.

There is concern that this tax will create a new incentive for homeowners to get involved in the underground economy.

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