HST Means No More ORST Purchase Exemption Certificates
I received the following question today:
I am a furniture manufacturer who works with interior designers. When I invoice, if an item is being re-sold by the designer then I do not invoice the Ontario retail sales tax (ORST). The designer will invoice ORST directly to the client. How will this change with the HST? Will my clients be exempt if they are re-selling an item? Also, when I purchase materials for manufacture many items such as wood, screws glue etc are PST exempt when I purchase them and get added into the cost once sold to the customer? How will the HST deal with this?
The answer is that the furniture manufacturer will be required to charge HST when he/she sells to the interior designer. The interior designer is no longer entitled to provide an ORST purchase exemption certificate to be exempted from payment of sales tax. The interior designer will pay the GST/HST and claim an input tax credit (if he/she is registered for GST/HST purposes. The interior designer will charge the final consumer GST/HST.
In addition, the furniture manufacturer will no longer purchase his/her inputs using an ORST purchase exemption certificate. In other words, the furniture manufacturer must pay GST/HST on all materials and components used in the manufacture of the furniture. The furniture manufacturer would be entitled to claim an input tax credit if he/she is registered for GST/HST purposes.
This will result in cost flow issues for both the manufacturer and the interior designer (the two businesses in the example). The businesses will have to fund the GST/HST portion when paying invoices and will be able to claim input tax credits (and offset GST/HST collected) on their GST/HST returns for the period during which the supply occurred. I am told that some businesses may need to increase their lines of credit in order to fund the HST component that was previously ORST exempt by virtue of the purchase exemption certificate.
To be clear, on July 1, 2010, purchase exemption certificates will be invalid for purchases after July 1, 2010. The days of the sales tax relief will over gone for good. The Canada Revenue Agency auditors will be auditing the entire supply chain to make sure that GST/HST was paid at each step in the supply chain.
Cyndee Todgham Cherniak is the founding lawyer of LexSage, a boutique international trade law and sales tax firm in Toronto,
