RCC Submission
February 7, 2006
Issues — PST and GST = Double the Trouble
Background:
The current tax system requires businesses to administer two separate sales taxes, one at the provincial level and one at the federal. The federal government levies the Goods and Services Tax (GST) on most property and services supplied in Canada. The province of BC levies the Social Service Tax (SST or PST, as it is more commonly known) on most goods and services supplied in B.C.
Each government has its own audit process with the attached necessity to maintain records.
The Problem:
Two separate sales taxes is counter-intuitive to this Review's mandate of streamlining and translates into higher costs for businesses in the following ways:
- The PST is paid on the purchase of inputs for businesses (i.e. materials and supplies) unlike the GST which provides input tax credits.
- Businesses must deal with two sets of auditors enforcing compliance at the federal and provincial level.
- Businesses require separate record keeping, reporting, and remittance for the GST and PST creating additional accounting and administration costs.
The Solution:
For many years, RCC has pressed for harmonization of provincial sales taxes with the GST. We believe the value-added nature of the GST is much superior to the retail sales tax model. As well, harmonization of commodity taxation into one system also would bring important economic benefits and savings to governments and taxpayers. RCC was an active and vocal supporter of the implementation of the Harmonized Sales Tax in the three Atlantic Provinces.
A major reason for our support of the integration of the two consumption tax systems is that it promises to lower the cost and administrative burden of administering the taxes, both for governments and taxpayers. This remains an important and valid objective. Indeed we believe the cost to firms of administering multiple tax collection systems for governments is a significant drag on their cost competitiveness. We recognize that tax administration is part of a corporate citizen's responsibility, but governments have an obligation to ensure that the system operates as efficiently as possible and costs are minimized.
A second argument in favour of harmonization is that it would remove the tax cascading that is now present. Retailers, their suppliers and all other businesses pay provincial sales taxes on many of their inputs. These taxes must be built into cost structures and passed on through the supply chain. When the final retail customer pays GST and PST, a portion of the price base is comprised of sales taxes already paid by the retailer and its suppliers. In fact the customer is paying tax on top of tax.
However, RCC's support is conditional on the final design of the harmonized system because one flaw in the design will eliminate the flow-through of the benefits to consumers. For consumers to receive the benefits of harmonization, retailers must be allowed to display prices tax-out. This is necessary to accommodate the differing levels of consumption tax across the country. Tax-in pricing will require merchants to display different prices for the identical product, purely on the basis of different tax rates. The costs and inefficiencies of such a system would balkanize the national market and the modern logistics system that serves it. The costs far exceed any tax saving and would destroy 20 years of technological progress in product distribution. Mandated tax-in pricing would also destroy national advertising campaigns, national flyer distribution, and national catalogues. All of these effects would put upward pressure on retail costs and prices, and reduce the vigour of price competition. At the same time, foreign competitors such as U.S. catalogue retailers would gain a competitive advantage by being able to show their prices tax-excluded. Permitting tax-out pricing will also help to ensure that consumers can verify that they are being charged the proper amount of tax on their purchases.
The only scenario under which national tax-in pricing will be beneficial to consumers and thus acceptable to retailers, would be if there was a single rate, a single tax base and a requirement that any changes in these two elements be done uniformly, nation-wide.
Recommendation:
- That the B.C. government begin the process of harmonization of the PST with the federal Goods and Services Tax by conducting an implementation study.