The Provincial Sales Tax Act (“PST Act”) will bring the provincial sales tax (“PST”) back into force in BC on April 1, 2013. The PST will replace the harmonized sales tax (“HST”), which a majority of voters chose to get rid of in the BC HST referendum held in the summer of 2011.
This article will provide an overview of the new PST. It will focus on what goods and services are subject to PST. It will also briefly touch on the rates of tax and the rules governing the transition from HST to PST. It will not touch on the PST regulations as the regulations have not yet been released. The regulations will contain the majority of exemptions from PST.
What is Taxable?
There are three basic classes of goods and services subject to PST: tangible personal property; software; and taxable services.
1. Tangible Personal Property
Tangible personal property is defined, in part, as personal property that can be seen, weighed, measured, felt or touched, or that is in any other way perceptible to the senses. In other words, tangible personal property includes items that are commonly called goods, such as building materials, computers, furniture, office supplies, and vehicles.
Tangible personal property is also defined to include items that do not appear to be tangible and/or personal property, which reminds one of Justice Bowman’s quip that “Parliament … has the power to deem cows to be chickens”. For instance, tangible personal property is defined to include natural or manufactured gas, electricity, heat, and certain fixtures. Fixtures are at common law considered real property and not personal property. Nonetheless, the PST Act deems“affixed machinery” to be tangible personal property. The PST Act also considers an improvement to real property that is removed from the site at which it is affixed or installed to be tangible personal property while it is removed from that site.
The treatment of affixed machinery as tangible personal property adds a significant amount of complexity to the PST. Basically, affixed machinery is any machinery, equipment or apparatus used in displaying, producing, storing or transporting tangible personal property or providing a software or service, and is affixed to a building or land in such a manner that it is considered at common law to no longer be personal property. However, there are two important exceptions.
- Certain building infrastructure is deemed not to be affixed machinery. This exception applies to air conditioning, heating, lighting and sewage disposal systems, and it also applies to elevators and escalators.
- There is a very complex exception that can only be described by quoting the actual provision. Under this exception, something is not affixed machinery if it satisfies all four of the following criteria:
- is of such a size that it must be constructed on the site where it is to be used;
- by its nature or design, would normally be expected to remain, for its useful life, on the site at which it is constructed;
- does not run on rails or tracks, or does not otherwise move around on or from the site at which it is constructed; and
cannot be moved from the site at which it is constructed without:
- dismantling the machinery, equipment or apparatus, or
- dismantling or causing substantial damage to the building or structure to which it is affixed or in which it is installed.
There is also an exclusion from the definition of affixed machinery for machinery, equipment or apparatus prescribed by regulation.
Based on the above, the following are examples of affixed machinery: any type of crane, including ship loading equipment that runs on rails or tracks; and machinery or storage containers that are only bolted to a building or land and can be moved without dismantling or causing damage.
The sale of or a service provided to affixed machinery will be subject to PST, unless there is an applicable exemption. For asset sales and service contracts that involve fixtures, it will be important to determine whether the fixtures are affixed machinery. If the fixtures are taxable affixed machinery, there will be a requirement for the purchaser of the asset or service to pay PST.
Under the old PST, software was treated as tangible personal property. The new PST provides special provisions just for the taxation of software. Part 4 of the PST Act deals solely with software.
The PST Act defines software as a software program that is delivered or accessed by any means. The PST Act also defines software as the right, whether exercised or not, to use a software program that is delivered or accessed by any means.
3. Taxable Services
There are five basic classes of services subject to PST: related services; telecommunications services; accommodation; services related to certain contracts; and legal services.
A related service is any service provided to tangible personal property or any service provided to install tangible personal property. There are four exclusions from the definition of related service:
- services provided to install tangible personal property that will become affixed machinery or an improvement to real property on installation;
- services provided to an employer by an employee in the course of employment;
- services provided to manufacture tangible personal property that is fundamentally different from the tangible personal property from which it was manufactured; and
- services provided to software or to install software that is subject to PST or is exempt from PST under Part 3 of the PST Act.
Telecommunication service is defined to mean any of the following:
- the right, whether exercised or not, to utilize a telecommunication system to send or receive telecommunications by means of an electronic device that is ordinarily situated in BC;
- the utilization of a telecommunication system to send or receive a telecommunication by means of an electronic device that is ordinarily situated in BC;
- a dedicated telecommunications service; and
the right, whether exercised or not, to download, view or access, by utilizing a telecommunication system, one or more of the following telecommunications by means of an electronic device that is ordinarily situated in BC:
- an audio book;
- an audio program;
- a ring tone;
- a television program, motion picture or other video; and
- a prescribed telecommunication.
Accommodation refers to lodging in a hotel, motel, resort, boarding house, rooming house or bed and breakfast establishment, other than a lodging excluded by the regulations. The regulations may also prescribe certain other lodgings to be taxable accommodation.
Services related to certain contracts are included as taxable services to stop parties from separating the purchase of tangible personal property from the purchase of services, thus avoiding having to pay PST on the services.
Legal services are also taxable.
What are the Rates of Tax?
The PST will have a general rate of tax of 7%. The 7% rate will apply to most items. However, there are also several special rates.
There will be a special varying rate for sales and leases of luxury vehicles. An 8% rate will be applied to vehicles with a price that ranges from $55,000 to $55,999, a 9% rate for vehicles with a price that ranges from $56,000 to $56,999, and a 10% rate for vehicles with a price equal to or greater than $57,000.
Other special tax rates include a 12% rate on private sales of vehicles, a 10% rate on liquor, and an 8% rate on accommodation with up to another 2% added for accommodation in designated areas.
What are the Transition Rules?
The general transition rule for the purchase of tangible personal property, software, or a taxable service is relatively simple. If the consideration for the tangible personal property, software, or taxable service is paid or due before April 1, 2013, only the HST is applicable to the transaction. If the consideration is due on or after April 1, 2013, the PST and 5% goods and services tax (“GST”) are applicable to the transaction as long as the tangible personal property, software, or taxable service has not already been paid for on or before March 31, 2013. Section 33 of the PST Act determines when consideration is due.
There are various special rules for certain transactions which make it difficult to determine whether the HST or PST/GST are applicable to a transaction. Therefore, individuals and businesses should seek assistance from a legal or accounting professional in order to determine whether the HST or PST/GST applies to a transaction that straddles the transition date. The transition rules for real property are especially complex.
The transition back to the PST will create many challenges for BC businesses and businesses with connections to BC. The most basic challenges will be knowing when to collect and remit the tax and when to pay the tax, especially when self-assessment is required.