HST: Boost or bust for tourism industry?

Author: Lyle Hall

In March 2009 the Government of Ontario announced the introduction of a harmonized sales tax (HST) followed by the Government of British Columbia in September.  The current provincial sales tax in BC and Ontario is 7 per cent and 8 per cent respectively.  On July 1st, these rates will be combined with the 5 per cent Goods and Services Tax resulting in a 12 per cent and 13 per cent tax in each province. 

The announcement of HST took the tourism industry by surprise in both jurisdictions.

The tourism industry’s concern however, is not the actual rate of taxation, rather the broader array of goods and services now captured, as well as the various exemptions and exclusions….not to mention several unknowns. 

Further, not only will the tax on a broad range of tourism-related goods and services increase, the introduction of HST has potentially damaged the mechanisms (i.e., hotel taxes or fees) relied upon in both provinces to fund marketing activities.  

But, first things first. Why harmonize sales taxes? 

Harmonization can be shown as beneficial for manufacturers and other industries where labour is not the principal input, which is why the Ontario and British Columbia Chambers of Commerce are advocates of harmonization.  Effectively, harmonization eliminates, or at least reduces, the provincial sales taxes layered on to the different stages of manufacturing via input tax credits.  The end customer pays the tax once rather than different businesses in the manufacturing process.

However, the impacts on tourism appear to have been either overlooked or not considered as:

1. tourism is a service business with labour being the largest cost and
2. as leisure travellers as well as foreign travellers (leisure and business) are not able to access input tax credits.  The result?  Higher prices for domestic leisure as well as foreign travellers, and limited benefits to tourism businesses.

HLT Advisory assisted the Tourism Industry Association of Ontario (TIAO) by quantifying the impacts of HST on the tourism industry.  While the focus of our analysis was Ontario, the BC tourism industry will see similar impacts.  Among the key findings were:

• Many more tourism services captured under HST—Tourism commodities previously assessed only GST will see tax rates more than double including campground rental charges, green fees, ski lift tickets, equipment rentals, convention planning services and taxi fares.
• Absence of input tax credits—The primary expense for most tourism operators is labour, which is not subject to HST and therefore does not generate Input Tax Credits.  Further, for those tourism businesses offering food and beverage service, Input Tax Credits will not be available for basic food products used in the production of meals.  One of the few instances where a tourism operator could claim a significant ITC of the same order-of-magnitude as a manufacturing operation is for power consumption.  However, Ontario’s major ski resorts will not be eligible to claim ITCs on purchases of electric power as businesses with $10 million or more in sales are ineligible to claim ITCs on power consumption until 2015.
• Rebate programs—In 2007, the Foreign Convention and Tour Incentive Program (FCTIP) replaced the Visitor Rebate Program as a means for international visitors to claim a rebate on GST or HST.  The details of how this program will be applied going forward (and how it will be applied in 2010 when HST comes into effect on July 1st, when most travel packages will already have been sold) is an unknown.
• Cost of beverage alcohol—On the surface one of the benefits of harmonization is the elimination of a two-tier pricing system for beverage alcohol (alcohol sold at licensed premises in Ontario currently attracts retail sales tax at 10 per cent rather than 8 per cent).  Harmonization will see this tax reduced by two percentage points, although both the Ontario and British Columbia budgets contain measures to increase the base price to offset any benefit.
• Elimination of the provincial sales tax refund for retail purchases in Ontario by non-residents of Ontario.

Along with these findings is the “elephant in the room” specifically, the impact on marketing funds resulting from changes to taxation structure affecting the voluntary Destination Marketing Fund in Ontario and the hotel room tax in B.C.  

This situation is exacerbated in both provinces by anticipated governance changes (the additional of a regional structure in Ontario and bringing Tourism BC back into government).TIAO and COTA remain the “go to” industry associations monitoring the impact of HST introduction in Ontario and British Columbia.

Lyle Hall is a managing director of HLT Advisory, a Toronto-based consultancy focused on the hospitality, leisure and tourism industries.