Harmonized Sales Tax and Selling Online

The debate about internet sales taxes is raging in the United States.

When I started selling things online 9 years ago, one of the first revelations that hit me was my competitive disadvantage vis-a-vis my American competitors, because I had to charge the 7% GST (now 5%).

“Shipped” goods from the U.S. to Canada could get hit with customs, and, of course, higher shipping, so a Canadian “e-tailer” selling to Canadians was pretty safe (selling to the U.S., they could not charge GST, but they’d have all the shipping disadvantages going the other way).

“Virtual” goods (such as domain names and website hosting, which we sell) are at a major disadvantage when marketing to a U.S. customer. And Canadian consumers could buy from a U.S. company and skip the GST. (There are a number of other business reasons Canadians shouldn’t do this, though, which I’ll have to cover in a different article.)

Now the U.S. is on the move to level the taxation playing field (or complicate it further … we’ll see).

Alas, that’s just one story shaking up e-commerce.

The (largely ignored) story is Ontario’s agreement with the Federal Government to move to the Harmonized Sales Tax (HST).

This development is massive.

First of all, most Canadian “e-tailers” operate out of Ontario.

Right now we charge 5% GST. Presumably our Ontario competitors will be charging 12 or 13% HST, and presumably this tax will apply to all their Canadian customers.

This will create a massive competitive disadvantage for any “e-tailers” located in Ontario who are peddling “services” online (which are generally PST exempt in “disharmonic” provinces). Of course Atlantic Canada has had HST for years, but they are not the hot-bed of Internet retailers that Ontario is (and maybe the HST is one reason why).

I’ve spoken to a number of business folks in Ontario who are strongly considering moving their entire operation out of Ontario if the HST goes through.

Meanwhile, the Federal Government is hoping all provinces will harmonize their sales taxes. Fat chance. I think B.C. should definitely not move forward with it if Ontario does – the influx of investment dollars from Ontario into the internet business will be massive.