PST – The Sequel: six-month report card

Some businesses applaud return of the provincial sales tax, but others lament B.C.’s brief flirtation with the HST
Alliance Truss owner Kevin Mindel: "[The PST] does absolutely nothing for me as a manufacturer"

No champagne and shrimp cocktail for Kevin Mindel to mark this anniversary; the owner of Abbotsford’s Alliance Truss is too busy eating extra costs and wrestling with accounting complications resulting from the PST’s April 1 return to British Columbia.

Down at the province’s restaurant industry headquarters, however, you might find a glass or two being raised October 1 to celebrate that same anniversary: six months since the HST was sent packing.

While the second coming of the provincial sales tax in B.C. might have had more to do with politics than economics, its return has yielded mixed results so far for assorted business sectors across the province.

The BC Liberals’ HST initiative sparked widespread public ire when it was announced months after Gordon Campbell’s Liberal party said prior to the May 2009 provincial election that it was not considering instituting a harmonized sales tax. The tax itself was introduced less than a year later, on July 1, 2010.

To the chagrin of industries that were banking on the tax’s efficiency and relative simplicity and to the applause of those that saw the HST as another government tax grab cooked up in political backrooms, the HST subsequently fell victim to the Liberals’ inability to sell its benefits in the court of public opinion.

So how is business doing six months into the new-old PST era?

Economists and other analysts say it’s likely too early to deliver a definitive verdict on the business impact of the PST’s return, but BC Chamber of Commerce president John Winter pointed out that not much has changed for the consumer in such industries as the restaurant trade, which was one of B.C.’s most vocal HST opponents.

“I don’t see any of them changing their prices [as a result of the PST’s return].

He added that because the PST is a hybrid tax levied on some things and not on others, its real cost “is something we’ll never be able to see or measure.

“I think we were just beginning to see some of the benefits of better more competitive pricing as a result [of the HST]. Down the road we’ll [realize] that we are stuck with a terrible tax that is very regressive in so many ways, and we are less competitive than we were.”

In fact, last week the BC Chamber called for a “broad public dialogue” for a new value-added tax.

The Business Council of BC (BCBC) estimates that the province’s businesses will collectively face higher annual sales tax compliance costs of around $150 million dealing with two separate sales tax systems – the PST and the federal GST – which have different tax bases, exemptions and filing and remittance requirements, the organization’s executive vice-president Jock Finlayson said.

On the other hand, the PST surprisingly has yet to kickstart “any pickup in overall retail sales or consumer spending,” he said.

Fraser Institute senior economist Charles Lamman added that B.C.’s overall tax rate on new investment went from approximately 16% (with the HST) to the highest rate in the country at 27% (with PST), Lamman said.

Because the HST removed sales tax on machinery, production materials and other business inputs, the 2012 report from the Expert Panel on BC’s Business Tax Competitiveness estimated that B.C. companies would pay approximately $2 billion more in annual sales tax under the PST than under the HST.

But, as with B.C.’s hotly contested HST referendum battle, two sides remain entrenched on different sides of the HST-PST battlefield.

Bill Tieleman, strategist for Fight HST and president of West Star Communications, said the elimination of the HST ”means my consulting clients are no longer forced to pay an extra 7% tax on services my company – or others in this and similar sectors – provide.”

He added that the government tried to sell the tax as neutral, but instead it was “siphoning an extra $800 million a year to government coffers.”

Down on the shoproom floor, there’s a similar HST-PST divide, but it’s far less polarized.

Had it been in step with the majority of its industry compatriots and restaurant association representatives, local diners would have been applauding the August 2011 referendum that sank the HST in a 55% yes [sink it], 45% no [keep it] vote.

After all, the B.C. restaurant trade had suffered some serious hits to their bottom lines in the post-2008 economic downturn. Stricter drinking and driving laws and a higher minimum wage in B.C. were two of those hits. The HST, which added another 7% to restaurant meal tabs, was major hit No. 3.

Ian Tostenson, BC Restaurant and Foodservices Association CEO, said the PST’s return has brightened outlooks for his industry, especially for full-service restaurants, where sales growth was minimal during the HST era.He estimated that monthly sales in B.C. full-service restaurants were up approximately 7% in April, May, June and July.

According to BCBC numbers, B.C. restaurant sales rose 8% in 2013’s second quarter versus the same period in 2012.

But BCBC research also points out that growth in restaurant sales was weak prior to the July 2010 introduction of the HST and that those sales started to grow approximately six months after the HST came into effect.

Tostenson conceded that 2013’s sales increases can’t all be attributed to the return of the PST.

He added that it was more the timing of the HST’s launch than the tax itself that hurt B.C. restaurants.

“The industry would have preferred that the HST stayed and there were exemptions for some of the industries, particularly restaurants, that are so vulnerable to those kinds of [taxes],” Tostenson said. “The [HST] is a great tax, but in a recession, putting the price of anything up 7% … there is no way for restaurants to offset those cost inputs.

“If we had done it in the heyday of the economy, no one would have cared,” he added.

B.C.’s manufacturing industry, a big supporter of the HST, which, unlike the PST, allowed them to recover the tax they incurred on materials and other inputs used in manufacturing, is far less ambivalent about the PST’s return.

It hates it.

For example, Ben Hume, Sheppards Building Materials Inc. president, estimates the PST will raise the annual costs of his 23-employee business by $11,000.

In addition to operating costs, the complications of returning to a dual PST/GST system have added significantly to workloads, especially in smaller businesses.

Betty Lou Pacey, president of BL Innovative Lighting’s B.C. Division, pointed out that the extra time needed to track and unravel additional red tape has “increased our costs by two full days of man/woman hours a month. [As manufacturers] we have had to go back to all of our customer base and contact them for their PST account number,” Pacey said. “When you’re dealing with thousands of customers this becomes an extremely costly process. Again this is one more example of a ‘death by 1,000 paper cuts’ to the manufacturing sector.”

For Mindel, the bottom line hit is not just financial. It’s more government-generated confusion in an already competitive marketplace for small to medium-sized manufacturers.

“[The PST] does absolutely nothing for me as a manufacturer. My accounting department just hates it.”

He added that contractors are refusing to pay the 7% PST on construction trusses his company is supplying to them.

“They are just backing out the 7% on their bill, saying it’s your guys’ responsibility to pay the PST.”

He said most of Alliance’s larger customers understand the new PST regime, but some of the smaller contractors don’t.

“We are talking contracts of around $150,000 – so 7% of that hurts a bit. The HST kept things so simple; it’s really been a nightmare, especially switching back and forth.”

The consensus thus far then on this six-month anniversary of the PST’s return appears to be that it’s providing some relief in some industries but the overall efficiency of a single harmonized value-added tax and the competitive edge it provides many business, especially those in manufacturing and resource industries, means B.C. has far less to celebrate under this new reconstituted tax regime, and, for many, B.C.’s brief HST era is now but a fond memory.

As Jordan Bateman, B.C. director of the Canadian Taxpayers Federation, said, “[The HST] is like a girlfriend B.C. just can’t get over – we still talk about her all the time, and I fear maybe we always will.” •

Film/TV production

Peter Leitch, chairman of the Motion Picture Production Association of BC:

“The PST is one more impediment to attracting film business to the province. … It’s another factor that in overall costs makes it more expensive to do business in B.C.

“Like any other manufacturer if your inputs [such as wardrobe, lumber for sets, camera and lighting rentals and purchases of props and set decorating] are more expensive than your neighbour’s and they sell at a lower price, that’s where it becomes challenging.

“How much have we lost [because of the PST’s return]? Who knows? But it makes it more difficult for us to have the confidence to be able to expand infrastructure and attract business.”

Real estate

Norm Coutie, president of Adera Development:

“We don’t believe that the return to PST has done anything to help the real estate industry. It will increase costs of materials used in construction, which will either increase prices or squeeze margins. The tax is hidden in the costs and not transparent – with additional administrative burden to many parties. As virtually all economists agree (which doesn’t happen often), no tax is a good tax, but if you are going to tax then a value- added tax is best.

“The transition back was probably worse than originally expected given the late release of the transitional rules and the condensed time frame for legislated communications we had to provide to buyers on the transitional rules.

“The transitional rules effectively put the consumer in the same place as they were pre-HST [in the case of the more modest-priced homes that Adera sells] and based on sales over the summer we don’t believe the PST has had an effect.”

Bob de Wit, Greater Vancouver Home Builders’ Association CEO:

“With the changeover from HST to PST, the total cost of labour to the homeowner has gone down, making renovations more attractive.

“This has done a couple of things: it has increased the pace of business among renovators, but it’s also helped drive, albeit in a small way, the resale market, since some buyers perceiving lower renovations costs will consider purchases they otherwise might not.

“On the materials side, the only impact has been how the total tax bill is presented. With HST, buyers could more easily see what the government’s take was; with PST it’s embedded into prices.”

Resources

Gavin Dirom, CEO, Association for Mineral Exploration BC (AME BC):

“AME BC had endorsed the HST because mineral exploration companies and prospectors benefited from the elimination of embedded PST in the products they purchase, including heavy equipment, services and such things as non-turbine aircraft, all-terrain vehicles, camp and office equipment and satellite phones.

“Mineral exploration companies and prospectors were paying PST on these items and could not recover that tax.

“Because mineral exploration companies and prospectors do not have a product to sell per se [with the eventual exception of their mineral or coal property] they can’t pass the PST on to a further customer by embedding it into the property sale price.

“Under the PST system, mineral exploration companies and prospectors are disadvantaged compared with most other businesses, despite a wide range of exemptions.”

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