Title: Harmonization headaches
Sub-title: Experts say harmonized sales tax initiatives such as those being considered in Ontario, British Columbian and Manitoba require less paperwork than the separate PST and GST initiatives. However if implementation isn’t done fairly, harmonization could end up being little more than a disguised tax grab levied on products such as tobacco. This would hit convenience store operators and consumers hard.
When talking about the challenges they face, convenience store operators tend to focus on customer experience. Merchandising, store layout and employee quality are all crucial to stimulating traffic. A far less visible challenge that operators face is managing compliance with ever-changing tax laws, particularly those related to the sales taxes they are required to collect and remit to the federal and provincial governments.
Tracking and complying with sales tax laws is particularly difficult, because provinces set their own sales tax rates and have great flexibility on choosing which products those taxes will be levied on. To ease the administrative burden, several provinces such as Nova Scotia, New Brunswick and Newfoundland, long ago harmonized their provincial sales taxes with the federal goods and services tax. In Quebec, the provincial government collects the GST for the feds, meaning that businesses have only one form to fill out each filing period.
In recent months, several other provinces, including Ontario, British Columbia and Manitoba have signalled their desire to jump on the harmonization bandwagon. However the big challenge for convenience store operators and consumers is that governments often cannot resist the temptation to use tax code changes to slip in new tax increases.
Could convenience stores and consumers be the big losers in sales tax harmonization efforts?
According to one expert, details of Ontario’s Harmonized Sales Tax initiative, set to take effect on July 1rst of next year, have yet to be hammered out. “We know that the implementation is unlikely to be “revenue neutral” in its effect on taxpayers,” says Peter Chappell, a senior category manager at MACs stores. “The main issue will arise on products in which we do not currently charge PST, notably tobacco. If after HST implementation we have to apply the full 13 percent levy on cigarettes, this would result in an 8 percent tax hike on prices at the retail level.”
Chappell, who has been at MACs stores for 17 years, currently works in the 575 store Ontario division and has been following the situation closely. “Tobacco products make up a significant percentage of convenience store sales,” says Chappell. “For smaller stores, the total can rise to as much as between 30 and 50 percent of annual revenues. So if HST implementation amounts to a back door tax hike on tobacco prices, this would profoundly affect our business model.”
Consumers and public policy will be affected too
Dave Bryans, president of the Canadian Convenience Stores Association agrees. Bryans sees the challenge as a broader one that affects not just the interests of convenience store operators, but those of public policy makers and general consumers as well. “Just a few years ago the Ontario government abolished its provincial sales tax on cigarettes in an effort to curtail the tax evasion created by contraband cigarettes and the effort led to substantial successes,” said Bryans, “Now it looks like we may be poised to take a step backwards.”
According to research conducted by Gfk Research Dynamics, illegal cigarette sales in Ontario have been skyrocketing in recent years. During 2008 they comprised close to half of all cigarettes sold in the province, up from just 24 percent just two years earlier. Worse, among those most affected are children, who under current legislation are prohibited from buying cigarettes in convenience stores. However many contraband distributors have no such reservations against selling to minors. In fact research on cigarette butt samples collected in school yards shows that students are major consumers of contraband tobacco.
An effective compromise solution?
According to Bryan there may be a fairly simple solution at hand to remedy the current challenges. Bryan suggests that tobacco products should be exempt from the HST. The federal government would make up for its potential lost revenues by folding its 5 percent GST portion of the HST into the Federal Excise and Duty. Ontario, which currently does not levy a sales tax on cigarettes, would be unaffected.
At first glance it would appear that both levels of governments have a strong incentive in accepting Bryan’s suggested compromise. That’s because under the current regime contraband related tax avoidance is costing them a fortune. However as bad as things are, they could get a lot worse. Governments still collect some revenues from much of the current contraband traffic, due to the fact that they also charge taxes at the wholesale level. However if consumers start to get into the habit of visiting Indian reservations to buy their tobacco products, their consumption patterns could change altogether. That’s because many of the no-name sold at in the reservations, particularly the bags of 200 cigarettes (equal to a carton), which sell for as low as $10.00, have no taxes on them at all.
Of course Bryan’s solution would not solve all of the challenges that convenience store operators face from Ontario’s HST implementation. For example tax for example several other products, notably foodservice meals of less than $4.00 would also be subject to provincial portion of sales taxes for the first time. But with so much on the line for convenience store operators, due to the possible disguised tax hike on tobacco products, getting that issue out of the way would be a major step forward.
Peter Diekmeyer is CStore Life’s Quebec correspondent.
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