One risk-management step that is often over-looked in a time of sales tax reform is selecting "The Chosen One" in accounts payable who is tasked with reviewing all incoming invoices to ensure that suppliers are properly charging sales taxes.
When auditors arrive with their spreadsheets in hand, they conduct a (1) purchase side audit and (2) a sales side audit. During the purchase side audit, the auditor reviews a sample of incoming invoices to ensure that the business under audit has paid the right amount of sales tax on its business inputs. Where a supplier to the business does not charge retail sales tax (ORST) or goods and services tax (GST), the auditor will assess the purchaser business - as it is allowed to do under the law.
Businesses can control this assessment risk by assigning the task of reviewing incoming invoices to a trained person - "The Chosen One". This accounts payable employee will review each incoming invoice and either seek corrections from the supplier or make arrangements to self-assess the tax that is applicable, but not charged.
With the start of harmonized sales tax (HST) in the provinces of Ontario and British Columbia, this is a perfect time to ensure that someone is actively reviewing incoming invoices. First, you will want to make sure that suppliers are no longer charging ORST on invoices for goods and services provided after June 30, 2010. If a supplier still shows ORST or PST (provincial sales tax) or RST (retail sales tax) as being charged on the invoice, you will want to follow-up and ask for a revised invoice. It must be clear that ORST/PST/RST is not being charged. It may be that HST is being charged, but it must be clear so that an auditor is not confused.
On that point, HST is supposed to be a single combined tax. The vendor is not supposed to separate the charges into GST and HST on the invoice (except where the supplies are subject to the recaptured ITC rules). As a result, in Ontario, the invoice should identify 13% HST and no 5% GST and 8% HST separately.
In addition, "The Chosen One" should review incoming invoices to ensure that HST is being charged where applicable. As a result , you will need to determine when you must pay HST (not just when you must charge HST). You will have to understand the HST place of supply rules as they apply to purchases.
Businesses outside the HST Zone will also have to have "The Chosen One" selected and briefed on the HST place of supply rules. You should expect to see some invoices arriving from the HST Zone that will automatically charge HST at the applicable provincial rate of the supplier because that will be the safe default position. Communication will be important after the implementation of HST to correct these types of errors. When in doubt regarding the application of HST, the purchaser may obtain an advance ruling from the GST/HST Directorate of the Canada Border Services Agency.
Finally, non-residents of Canada that purchase goods/property and/or services from Canadian businesses also need to have "The Chosen One". Many Canadian businesses have adjusted their billing systems with the implementation of HST. There will be situations where previously zero-rated supplies (GST charged at 0%) will default in the computer systems to 12%, 13% or 15% HST depending on the location of the supplier. A quick call to the supplier to notify them of the change would be in order so that the computer errors can be corrected.
Note: ORST will still be payable on invoices for cetain insurance premiums.