Provincial Sales Tax Review

A competitive and streamlined tax structure benefits British Columbians by making it easier to do business, encouraging business growth and investment, and promoting British Columbia as the most small business-friendly jurisdiction in Canada. In turn, the economic benefits of a streamlined tax structure support the province's Great Goal to lead Canada in job creation.

To help achieve these benefits, the Ministry of Small Business and Revenue completed a review of provincial sales tax (PST) policies and legislation. The review sought to develop options to simplify, streamline and enhance the fairness of the sales tax.

Between November 2005 and May 2006, the Minister of Small Business and Revenue invited small business, industry and individuals to attend one of 20 PST Review consultation meetings in regions across British Columbia or to send written submissions by mail, email or facsimile.

With the support of the Ministry of Finance, the Ministry of Small Business and Revenue evaluated the resulting proposals and options based on whether they:

• support the Province of British Columbia's Strategic Plan goals;
• enhance British Columbia's business-friendly environment;
• minimize the negative impact on small business; and
• ease the administrative burden for retailers, who handle most PST collections and remittances.

Statutory and policy changes in Budget 2007 that flow from the PST Review are described below. These changes total $40 million annually in savings for businesses across British Columbia. The PST Review identified other options to simplify tax applications that will require further discussion and analysis, since they would result in fundamental changes for certain businesses. Through 2007/08, the Ministry of Small Business and Revenue will continue consultations with affected businesses on these issues, which are also listed below.

Tax Remittances

Extension of Remittance Date — Effective April 1, 2007, the due date for remitting tax returns and payments under the Social Service Tax Act and the Hotel Room Tax Act is extended from the 15th day to the 23rd day of the month. For example, tax collected or that becomes payable in March 2007 is due on or before April 23, 2007. This responds to complaints from businesses of all sizes that the current remittance period of 15 days is too short.

Clarification of Due Date — Effective April 1, 2007, the Social Service Tax Act and Hotel Room Tax Act are amended to clarify that tax returns and payments are considered remitted on time if they are received by the province on the due date. For remittances sent by mail, courier or other electronic means, the business must allow sufficient time for the return and payment to be received by the province on the 23rd of the month. This is a change from the return or payment being considered on time as long as the payment was sent on or before the due date. If the remittance is made at a financial institution, the payment must be dated on or before the 23rd. Remittances delivered in person to a Consumer Taxation Branch or Service BC office, must be received by that office on or before the 23rd.

Tax Return Reporting Frequency — Effective February 21, 2007, the threshold for reporting less frequently than monthly is increased under the Social Service Tax Act and the Hotel Room Tax Act. Business with annual tax remittances of $12,000 or less may qualify for quarterly, semi annual or annual reporting frequencies, depending on the amount of tax remitted, the nature of the business and compliance history. The increase from the previous threshold of $8,400 for less frequent remittances will provide greater flexibility for many small businesses to match their tax reporting frequency to their business needs.

Audits, Refunds, and Record Keeping

Audit Assessment Period Reduced — Effective February 21, 2007, audit assessment limitation periods are reduced to four years from six years under the Social Service Tax Act, Hotel Room Tax Act, Motor Fuel Tax Act and Tobacco Tax Act. All tax assessments issued on or after February 21, 2007 will be limited to a maximum of four years, including assessments related to audits that began before February 21, 2007 but are not yet completed. The four year limitation period does not apply in cases of fraud, for which there is no limitation period. All businesses in the province, including over 100,000 businesses registered to collect tax, will benefit from this initiative which reduces the impact of inadvertent error and the amount of potential tax liabilities.

Refund Limitation Period Reduced — Effective May 1, 2007, the limitation period for applying for a refund is reduced to four years from six years under the Social Service Tax Act, Hotel Room Tax Act, Motor Fuel Tax Act and Tobacco Tax Act. Applications for refunds of tax paid more than four years ago but within the current six year limitation period must be received by April 30, 2007 to be considered. This change does not eliminate any rights to refunds of tax. It simply reduces the time in which a refund may be claimed, and maintains consistency between audit and refund limitation periods.

Record Retention Period Reduced — Effective February 21, 2007, record retention periods are reduced to five years from seven years under the Social Service Tax Act, Hotel Room Tax Act, Motor Fuel Tax Act and Tobacco Tax Act. This change is consequential to the reduction in the audit assessment period, and reduces the record keeping burden for over 100,000 businesses that collect and remit tax as well as for other persons carrying on business in the province.

Audits of Liquor Licensees — Effective February 21, 2007, audit assessments of liquor licensees for variances between the amount of tax remitted on liquor sales and the amount of tax expected based on liquor purchases will be reduced from the current six year period to a maximum three year period. This measure enhances fairness for liquor licensees by implementing a similar approach to that provided to other retailers with variances due to unrecorded sales.

Registration and Collection Threshold — Effective February 21, 2007, persons with annual gross revenues of $10,000 or less from sales of all tangible personal property, other than motor vehicles (including all terrain vehicles and snowmobiles), aircraft, vessels (including personal watercraft) and liquor or parking rights, who do not regularly make sales or leases from established commercial premises and who do not maintain an established business premise are not required to register as a vendor and collect and remit tax on those sales. Eligible persons who choose not to register must pay tax on all items acquired for resale, including items used to make other items for sale, and must keep records of their sales. This measure removes the responsibility of collecting and remitting tax from approximately 20,000 small home-based craft persons and non-profit organizations that only make infrequent sales.

Exemptions

Oil and Gas Exploration and Development — Effective February 21, 2007, the social service tax exemption for production machinery and equipment used exclusively in the exploration for, discovery or development of petroleum or natural gas is expanded to include the following equipment:

• portable doghouses, winches, pickers, and boilers and steamers required for heating blowout preventers, but not the automotive unit on which the equipment is transported; and
• parts of a pump truck, including pumps, tanks, lines, pipes, controls, manifolds, drop boxes, mixing hoppers, valves, engines, and transmissions but not the automotive unit on which the parts are transported.

In addition, the Ministry of Small Business and Revenue will consult with oil and gas producers and processors to review the current interpretation of the definition of "well head" to ensure the tax application is clear.

Roadside Tire Services — Effective February 21, 2007, emergency roadside motor vehicle tire change services are exempt from social service tax. Currently, tire changing services are the only road side service subject to tax. Extending the exemption to tire changes eliminates a complexity for business.

Prescription Drug Samples — Effective February 21, 2007, prescription medications provided for promotional purposes by pharmaceutical companies to a physician, dentist or veterinarian are exempt from social service tax. Currently, prescription medications are only exempt when purchased by consumers. The extension of this exemption to samples of prescription medications removes an anomaly under which samples of non-prescription medicines are exempt but samples of prescription medicines are not.

Bare Leases and Lease with Operator — Effective February 21, 2007, the application of tax to equipment acquired for lease and occasionally supplied with an operator is simplified. Under the new provisions, businesses that occasionally use equipment from their lease inventory under an agreement to supply the equipment with an operator will only be required to pay tax on the normal lease price of that equipment. Currently, when equipment is removed from the lease inventory and supplied with an operator, the lessor is required to pay tax on the full depreciated cost of that equipment. This change eliminates the need for such businesses to maintain two separate inventories.

Catalysts and Direct Agents — As the result of the Review a recommendation was made to change the exemption for catalysts and direct agents used in a chemical reaction for the manufacture or transformation of a product for sale or lease. The recommendation was to expand the exemption to all substances used in the production process that are integral to the production (transformation of materials into products for sale or lease), even if they do not come into direct contact with the materials being manufactured.

In January 2007, a decision of the British Columbia Court of Appeal effectively broadened the exemption for catalysts and direct agents from the previous interpretation. While the result is not identical to the recommendation arising from the Review, it does expand the exemption.

Rather than implement the recommendation for catalysts and direct agents, Government will administer the exemption in accordance with the Court of Appeal's interpretation. Government is currently analyzing the Court's decision to determine how the exemption will be administered.

Further Consultations

A number of issues arose during the review which require further consultation. The government will consult on the following issues and develop recommendations for further simplification and streamlining of the tax system.

Farmers' Exemption — The current social service tax exemption for bona fide farmers is based on a prescribed list of approximately 300 items that are exempt to farmers. Interpreting and applying the list can be administratively burdensome for both farmers and retailers. Consultations will focus on simplifying the approach to the exemption.

Work Related Safety Equipment Exemption — The current exemption for work related safety equipment designed to be worn by a worker is difficult to interpret and apply for retailers, businesses and individual workers. Consultations will focus on simplifying the approach to the exemption.

Tax Application to Real Property Improvements — The current application of social service tax to improvements to real property contracts is complex because the application is dependent on the form of the contract under which the improvements are carried out. An additional complexity exists for taxable service providers as they must determine whether they are providing a service to an improvement to real property or to tangible personal property in order to ensure the tax is applied correctly. Consultations will focus on recommendations to address the complexities of the current application.

Transfer of Business Assets for Partnerships — The current application of social service tax to asset transfers to and from partnerships and transfers of partnership interests is implicit in the principles of the Social Service Tax Act. Consultations will focus on ways to bring greater certainty to the application of tax.

Trusts and Amalgamations — Consultations will be undertaken to develop public information providing clear guidelines on the application of social service tax to transactions involving trusts, or the amalgamation of companies or organizations.

Special Registration Permits — In consultation with industry, a special registration permit system will be designed to replace the Certificate of Exemption currently used by businesses eligible for the production machinery and equipment exemption, and to replace the refund system on purchases of goods for use out of province. The special permits will reduce the administrative burden for retailers and business.

Audit Sampling — Consultations will occur with the business community to develop proposals for modernized audit sampling techniques.