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Issues — The Exemptions Maze — It's a Jungle Out There

Background:
The number of PST exemptions in B.C. has grown substantially since the 1950's and 1960's. One indicator of the expansion is the amount of revenue government now foregoes due to exemptions:

The Problem:
As front-line PST collectors, retailers are obliged to remain on top of which of their products are taxable and which are not — a nearly impossible job when the list of exempt products has grown to hundreds and is changing as fast as technology can deliver new products, uses and adaptations.

A large retailer can have a list of individual products (known as SKU's — stop keeping units) of as many as 10,000 - 15,000 active SKU's and about 10,000 inactive SKU's with about 500 items added or deleted each day. The product descriptions provided by the manufacturer are written for marketing rather than tax purposes, so retailers cannot tell from the vendors sheets if a product is taxable in the province or not. The burden rests with the retailer to sift through pages of tax bulletins. Even one error per day on 500 items can be $100,000 a year in liability! It has happened.

Failure to conquer the exemptions maze, means retailers may inadvertently charge customers PST when they shouldn't, or set themselves up for an audit assessment on products where they should have charged PST and didn't.

Self-assessment of products brought in from out-of-province is onerous and time consuming as one needs to hunt through government lists and bulletins to locate the taxable status of a particular product. Said one independent retailer: "If the government is going to require self-assessment, you shouldn't need to have to hire a tax commodity consultant to do it."

The inherent ambiguity of exemptions can contribute to re-interpretations of regulations during PST audits that have been a cause of concern for our members.

The fundamental problem is that once an exemption is established, it is viewed by taxpayers as an entitlement that is very difficult — politically — to rescind. Consequently, the list of exemptions grows only larger and more complex with little or no regard to whether the policy objective when the exemption was originally enacted is still valid or even necessary.

Even the assumptions that gave rise to the concept of PST exemptions have not been re-examined since they were developed decades ago:

• That selective application of sales tax can shape consumer purchase behaviour and encourage acquisition of "goods" - i.e. bicycles
• That PST on an item is a key factor in a consumer's decision to purchase or not
• That government has the capacity to credibly pick PST winners and losers; those products where people ought not be "penalized" by PST and those where tax should apply - i.e. Clearasil is PST exempt; whereas Noxzema is subject to tax.

The list of PST exemption incongruities and inconsistencies is a lengthy one. Here are but a few examples that help explain why confusion can't help but reign supreme and taxpayers are left squinting to discern rational patterns of public policy:

• Yellow raincoats - taxable; orange raincoats - non taxable (because the latter is considered a piece of safety equipment.)
• Flame retardant clothing — non-taxable; Safe-T fire blankets — taxable.
• Loose leaf binders — taxable; loose leaf binders for school — non-taxable
• Condoms — taxable; bunion pads — non-taxable
• Miner's hardhats — non-taxable; miner's lamps that clip onto hardhat — taxable
• Garden soil with more than 50 per cent organic soil stimulant — non-taxable; with less than 50 per cent organic — taxable.
• Bicycle accessories (when sold with bicycle) — non-taxable; bicycle accessories (when sold separately) — taxable.
• Christmas trees (cut) — non-taxable; Christmas trees uncut — taxable

The myriad of exemptions can create confusion and conflict at the cash register:

"We charge/collect the PST on items we believe are taxable but some customers disagree with our interpretation — for example on pre-paid long distance phone cards — and can get quite obnoxious and threatening. Some stores collect PST on certain items while others don't. It's a mess. Please make it easier to understand and create a level playing field." — An RCC member in Abbottsford.

To date, technology has been unable to ride to the rescue. Few point-of-sale software systems have the capacity to identify the taxable status of each separate SKU (stock keeping unit).

With those that do, each time a change is made in item description, price, promotion, the retailer runs the risk of altering a tax flag. There are only so many checks and balances you can put in with so much data entry and changes each day.

Independent retailers are particularly hard-pressed to keep up with the host of PST exemptions — lacking sufficient backroom capacity. Even RCC members that are major national chains have acknowledged their inability to guarantee they are not charging PST on some exempt items. The possibility of audit provides the incentive, on the other hand, to ensure they are charging PST on all taxable products.

Recommendations:

• Short term: Conduct a comprehensive review of each exemption, its interpretation and application with a view to articulating the original public policy objective of each; and, if that objective is no longer valid or relevant, eliminating the exemption.

  Retail Council of Canada acknowledges the political difficulties for the government in altering the current exemption regime on a piecemeal basis. We believe the most effective way to unscramble this egg is a fundamental change as follows.

• Harmonize the PST with the GST:
  • Adopting the GST's less extensive set of exemptions;
  • In a manner that is revenue neutral, providing businesses with input tax credits and protecting lower income British Columbians through a tax refund system as is done with the GST.

With 7 per cent GST and 7 percent PST, BC consumers currently pay 14 per cent combined. But if a new harmonized sales tax (HST) were revenue neutral, the blended tax rate could go to 12 or 13 per cent because the HST, like the GST, would apply to a broader base. If the change is revenue neutral, the shift should be politically feasible as consumers would find themselves paying less on most of their purchases, while paying somewhat more on purchases that used to be PST exempt.