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Why is vat charged

why is vat charged

A mainly Canadian economics blog

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.

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