Why is there HST on used furniture?

The harmonized sales tax is a value added tax. 

At each stage of production, the government collects taxes on the value added at that stage.

Suppose, for example, a carpenter buys $10,000 worth of wood, makes it into furniture, and sells the furniture for $15,000.

At a 12% tax rate, the carpenter pays $1,200 HST when he buys the wood. He charges his consumer $1,800 HST when the furniture is sold.

The carpenter then sends the difference between what he collects and what he paid out - $1,800 - $1,200 or $600 - to Canada Revenue Agency. (The $1,200 rebate the carpenter gets for the taxes he pays is called an "input tax credit".)

Notice that the $600 the carpenter sends in to the CRA is equal to 12% of $5,000 - in other words, it's a tax on the $5,000 of "value added" by the carpenter through furniture production.

But with the population aging, downsizing, and selling off their 1970s dining room suites, who needs to make furniture any more? Used is where it's at. 

Suppose an antique dealer buys $10,000 worth of used furniture directly from the original owner, and then resells the furniture for $15,000.

At first glance, this looks exactly like the carpenter example above. The antique dealer will charge $1,800 in HST when she sells the furniture. 

But what about input tax credits?

Even if that furniture was produced before HST, it would still have been subject to a 13.5 percent manufacturer's sales tax, as well as provincial sales taxes.  

But when used furniture is resold, as a general rule there are no credits or rebates given for the taxes paid on that furniture first time around. 

Yes, there is value added by antique dealers and other resellers. But the logic of HST - and of value added taxes in general - suggests that the taxes should apply only to that value added, not to the entire sale. To tax the entire purchase, not just the value added, is to overtax.

This is a problem because it discourages purchases of used items. New furniture is taxed on the value added to those goods throughout the production process. Used furniture is taxed on more than the value added in the used furniture "production" chain. Those relatively higher taxes make used furniture purchases relatively less attractive.

But creating new furniture when perfectly good old furniture is readily available is a waste of resources - resources that could be used building things of greater value, for example, [insert your favourite public infrastructure or other project here]. 

Not all used items are taxed. Used houses are not subject to HST. Private sales of used cars are not subject to GST, but in Ontario are subject to a special 13 percent provincial sales tax "to level the playing field" between car dealerships and others. Used cars bought through a dealership are taxable, however.

The "level playing field" explanation is key to understanding why taxes are imposed on used goods. Retailers of new furniture might lose business if used furniture shops were HST-free zones; the new cars on the dealer's lot would look less appealing if the used cars were tax exempt.

As far as governments are concerned, therefore, taxing used goods is a win-win: it makes sellers of new goods happy, and it generates government revenue. The only people likely to complain are tax policy wonks who worry about environment - a constituency far too small to worry about.

Comments

[Eric Crampton]

Used goods happily exempt from GST in New Zealand - one of the very few exemptions (financial services, used goods... I think that's about it). Labour and the Greens, in opposition, keep pushing for muddying our system to make it look more like Canada's (patchwork exemptions for voter friendly goods), but Labour's been too sensible to wreck the GST when actually in government.

[Frances Woolley]

Eric - interesting - that's useful as a response to the "from an administrative point of view it would be possible to exempt used goods" argument.

Was the NZ GST a "from scratch" sales tax or did it replace a pre-existing sales tax? Were used goods taxed under the old sales tax? I'm wondering if perhaps there's some kind of we've-always-taxed-this-so-why-stop-now thinking behind the taxation of used goods in Canada.

The ever-authoritative Wikipedia says that in NZ "The headline price must always be GST-inclusive in advertising and stores." I wonder how important that GST inclusive requirement has been in terms of giving governments the gumption to resist vote-friendly exemptions?

[Phil]

An easier way to fix the problem would be that, when you sell used furniture to a business, you get a paper HST credit that you can redeem when you buy new furniture to replace it.

Something similar happened to me when my car stereo was stolen. They told me they couldn't pay me the GST on the value of the stereo until I bought a new one and paid GST on that.

As for the car dealers ... the playing field is now UNLEVEL because of the HST on used cars. As a private seller, you have to pay HST on the full value of the new care you buy. But if you trade your car in to the dealer, you pay HST only on the *difference* between the value of the old car the new car. (As if anyone needed even more evidence that car dealers were evil.)

[crf]

Perhaps the value of used furniture is really near zero, and the value added by the simple process of re-selling it is near equal to its sale price.

In which case, applying HST to the full price is warranted.

[Determinant]

Well, like much of the 1970's the furniture was mostly forgettable, except for Vilas. Vilas is classic and the finish is exquisite.

[Frances Woolley]

crf: "Perhaps the value of used furniture is really near zero" - that argument could be made to justify the fact that HST is charged by stores like Value Village. The goods sold by Value Village are generally donated goods, so the value of them is close to zero.

However that argument can't be made for furniture sold at auction, and consignment store typically pay the original owner 30% to 50% of the sticker price of goods sold.

Moreover, even if the value of used furniture is low, there is still an environmental argument for encouraging re-use of furniture and other items - the cost of disposing of old furniture is *not* zero.

Phil: "But if you trade your car in to the dealer, you pay HST only on the *difference* between the value of the old car the new car."

Taken in isolation, this makes sense. There is HST on used cars sold through a dealer, but because of the tax break on trade-ins, effectively the HST only applies to the difference between the trade-in value of the car and the selling value of the car. In other words, the value added by the dealer. Effectively you are getting a partial input tax credit for the HST that you paid on your old car when you bought it.

But then what doesn't make sense is the Ontario treatment of private car sales - because selling a car privately and then buying a new one from a dealer attracts more taxes in total than trading in and buying a new one from a dealer.

Ontario taxes private car sales the way they do to prevent dealers from posing as private individuals.

[Phil]

I agree; the problem is that the same beneficial tax treatment should apply to private sales as to dealer sales.

But I respectfully disagree that the policy is to prevent dealers from posing as private individuals. It would be relatively simple to do that in a way that does not benefit the dealers at the expense of individuals. For instance, the law could simply require dealers to obtain the buyer's signature on a statement that he's buying from a dealer. No statement would mean a heavy fine.

There are many other ways that could be done, too.

IMO, Ontario taxes private car sales the way they do as a result of successful rent-seeking by dealers.

[Richard R]

In BC the situation is much worse for boats. Before the HST, there was no GST/PST on the sale of used boats. And it is a pain to sell one privately, as the boat can be moored at a marina 45 minutes from home: somebody makes an appointment to view, then doesn't show up or is not serious, but just wants a joy-ride. So most sellers use a broker, who charges 10% commision (or $3000 if the boat sells for less than $30,000). The commission is of course also subject to the BC 12% HST. So the difference between what a seller receives and what a buyer pays is at least a whopping 23.2%!

The only "value added" in this case is that provided by the broker. But then boat ownership is hardly an example of economic rationality anyway.

[Eric Crampton]

I'm pretty sure the GST was designed from scratch to be as clean a VAT as possible. There may have been prior taxes, but the GST was introduced along with all the other massive changes during the reforms.

I think more important than GST-inclusive prices has been the contrary example furnished by Australia (and Canada) of the stupidity that comes from patchworked exemptions. The Australians a couple years back brought in an expert European witness to determine whether a bread was bread or cracker for tax purposes, then ignored what he said.

[Frances Woolley]

Phil: "But I respectfully disagree that the policy is to prevent dealers from posing as private individuals"

You may be right, but the Ontario government's rationale for taxing private sales here is as follows:

Automobiles – The private resale of vehicles in Ontario is currently taxed at 8% PST. Although these private sales will not be subject to HST their PST will increase to match it at 13%. The reason behind the tax change is to help maintain fairness in the Ontario used vehicle market. Many argue that auto dealers in Ontario are disadvantaged when it comes to selling used vehicles because of the tax break on private sales. The problem is compounded by curbsidders, which are a type of car dealer that falsely pose as private sellers to avoid GST (among other things).

If you were a dealer, you could sell a used car to yourself (or your spouse or...) at less than cost, and then get an HST rebate cheque from the government for 0.13*(expenses-revenues). You could then re-sell the car privately, and pocket the profits tax free. That would be tax evasion, of course, but still...

You might find this post interesting: http://www.ellenroseman.com/?p=1026.

Richard R - interesting. I'd imagine that this would be a more severe problem with boats than with cars as my impression is that a well-maintained sailboat will last a long time. Agreed about the economic rationality of owning a boat (other than a canoe) - still, this tax wedge encourages people to sink boats rather than repair/sell them and that's a waste of resources.

[Frances Woolley]

Eric - other examples along these lines: unsalted nuts are basic groceries, salted nuts aren't. When I was in grad school in England, it was impossible to buy granola bars with chocolate chips. Chocolate-chip-free granola bars were basic groceries, ones with chocolate chips are junk food.

But the best all-Canadian example is of Timbits, little tiny doughnuts (donuts). You might have come across something similar elsewhere called "donut holes." Six timbits counts as groceries - not taxed. One donut, an equivalent amount of yummy sugariness, is taxed, because it's take-out food. So GST causes people to substitute Timbits for Dougnuts. See http://doubleblind.ca/2007/01/29/waste-your-life-understanding-the-gst/

[Determinant]

Well, when the GST was rolled out it was considered politically expedient to exempt "groceries". It was controversial enough that a tax on food was the public's tolerance limit.

[Phil]

>You could then re-sell the car privately, and pocket the profits tax free.

The way it could work: when you buy a car, and pay the HST, the amount of HST you paid is kept on record by the Ministry. When you trade in or sell the car, and the buyer pays HST, the amount he/she pays is refunded to you. (So the net result is, if you buy a car for $20K and sell it later for $12K, you wind up having paid HST on only the $8K of car you consumed.)

If it's done that way, there's no tax-evasion benefit for curbsiders. Either way, the buyer pays HST and the previous owner gets it back. Plus, if the seller charges more than he paid, he gets back only the amount he originally paid.

That puts private sellers on equal footing with dealers.

[Eric Crampton]

Mmmmm..... Tim Bits.......

[jesse]

OK fine but then we must never refer to GST/HST as a "value added tax" because reselling a used good adds little value beyond the service overhead. And it IS hypocritical because new goods resellers receive tax rebates based on -- gasp -- non-value-add. Does the seller at the flea market where a used armoire is bought get an HST credit? How about when I trade-in my used car for a new one?

[Joel Wood]

I bought a used car in BC a month ago and was very, very disappointed and confused as to why I was charged HST on the used vehicle. I came to the same conclusion about the "level-playing field". Governments do not want to anger car dealerships, and are searching for allies when implementing the switch to the HST.

I bought my used car from a dealership, but I am pretty sure that in BC you pay HST on private sales as well. Someone please correct me if I am wrong.

[Frances Woolley]

Joel - it looks like the situation is the same as in Ontario. That is, there's no GST on private used car sales, but the government has imposed a special provincial tax at a rate of 12% on private used car sales.

The BC tax even has a name, the Tax on Designated Property (TDP): http://www.sbr.gov.bc.ca/documents_library/bulletins/ctr_001.pdf.

I was actually originally going to call this post "Why is there HST on used cars" (and you can see that this is still the url) but in fact it's not HST, it's this special TDP. I should have thought of a sexier title than used furniture however!

[Determinant]

I knew something was wrong with the OP and I was finally able to put my finger on it. With respect Frances, you missed the forest for the trees. VAT is a bit of a misnomer. It's not a tax on value added per se, but a consumption tax.

Input tax credits are designed to avoid tax cascading, whereby a sale gets marked up by X% on n stages of the production process. The total tax charged on each product is then X^n%, which is variable and creates a market distortion.

VAT sweeps that all away and clarifies that the incidence of VAT will fall entirely on the consumer at X%, the statutory rate, by allowing input tax credits. ITC's are to clean up the incidence and rate of tax, not to change the basis to some "value added". Value Added is merely a mathematical waypoint useful for collection arrived at by netting receipt; it's not a fundamental state on which the tax is based. You cannot and should not appeal to "Value Added" as an intrinsic property.

The collection of taxes in VAT regimes is borne by the vendor, not the consumer. In VAT regimes there is a clear and hard distinction between collection and incidence.

On this basis, purchasing used furniture is just as much consumption as purchasing new furniture and should be taxed at the same rate.

Since we live in the real world we will assume that at some point a piece of furniture was subject to VAT, but has been owned so long that nobody can remember it's original price and the consumer can't collect ITC's. This is partially compensated for by the normal used vs. new discount for used goods. In fact that discount in the underlying price and therefore of VAT charged would take care of most of the equalization. The exception is antiques which appreciate in value but then again this is clearly consumption and should get full VAT treatment.

[btg]

The rationale about having the 13% tax on privately sold used cars is hogwash - essnetially, the used car people lobbied the government using arguments like this and the province caved in - but the argument makes no sense.

first off, only a small percentage of cars over $5,000 are sold privately. a key reason is that if you sell a car insteadof trading it in, you lose the benefit of reducing the gst/hst paid on the car you buy by the amount of the trade in - if your trade-in is worth $10,000, you say $1,300 by trading it in - before the GST is was only 8% in ontario.

now, if you are a curbsider and buy a car, you pay 13% hst on it, or undert he old rules, just 8%. however, if you sell the car, you do not get this back from the government, unlike a properly registered business.

next, every car privately sold in ontario is supposed tohave a vehicle information package, which shows the ownership history. in theory, if a curbsider has recently bouth a car, fixed it up, and is trying to flip it, then it should show up on the history. if there is a problem, it is that the rules governing this requirement should be tightened up - such as putting in a place a rule that sales are only valid if done using forms that show the full history. many sellers do not actually produce the history, or could produce an out of date one.

the problem is that the 13% special tax is a tax grab, and one purely designed by the used car lobbyists to discourage all private sales of cars, of which curbsiders are a tiny minority. hard hit by the tax are collectors who buy and sell vintage cars, who generally never used dealers. at the very least, the tax should have been eliminated on cars 25 years or older.