Harmonized Sales Tax — Timing Your Tech Purchases
November 11, 2009
Brian C. Pel
Matthew D. Peters
Ontario and BC recently announced that they will harmonize their provincial sales tax (PST) with the federal goods and services tax (GST) effective July 1, 2010. In BC, the harmonized sales tax (HST) will apply at the rate of 12 per cent, compared with 13 per cent for Ontario and the other GST-harmonized provinces (Nova Scotia, New Brunswick, and Newfoundland & Labrador), and will be recoverable to the extent the recipient of the supply is fully engaged in commercial activities.
The HST will apply to the same tax base as the GST, with some limited point-of-sale rebates on the provincial portion for a few products. The major benefit of harmonization is that it will eliminate unrecoverable PST for most organizations in these provinces. Currently, organizations pay PST on a broad range of goods (and a limited range of services) acquired in or imported into the province, unless they qualify for a specific exemption such as the production machinery and equipment exemption. The HST will generally eliminate the non-recoverable PST burden. The provincial budget papers indicate that studies have shown that most of these tax savings are passed on to consumers through lower prices.
Businesses (particularly in the financial and public sectors) that have large service or outsourcing agreements in place, that are looking to make large-scale purchases or are considering entering into significant service contacts in the near future, should factor into consideration the impact of the HST, as this may result in significant additional costs or savings to them. Likewise, tech companies that sell software, hardware and services should take the HST into account in their sales efforts as there may be opportunities for accelerated deals in certain circumstances.
McCarthy Tétrault Notes:
To benefit from potential tax savings or minimize tax liability, as the case may be, it is extremely important that businesses promptly review and consider the impact of HST on their current service and outsourcing agreements and on their procurement plans. In certain instances, businesses may wish to delay significant capital purchases until after July 1, 2010 to take advantage of the available input tax credits.
On the other hand, financial institutions and those public sector bodies (such as provincial lottery corporations) that do not charge GST on their services, and cannot take advantage of input tax credits, may wish to expedite some of their expenditures or rethink some of their existing service and outsourcing agreements. Once the HST is implemented, the costs under existing service and outsourcing agreements will immediately increase — the unrecoverable tax portion will climb from approximately five per cent to 12 per cent in BC and 13 per cent in Ontario (depending on the extent of the particular organization’s level of commercial activities).
Before entering into or renewing significant outsourcing or services agreements, organizations should seek tax and legal advice on structuring their supplier arrangements to achieve their business objectives in a tax-efficient manner. Vendors that can propose novel ways to address this significant problem for these types of customers could have a material advantage over their competitors.
Ontario and BC have released detailed transitional rules. These rules will be important to understand as they will govern transactions occurring around the July 1, 2010 HST implementation date and may have a marked effect on hardware and software sales during this period.