On July 23, the British Columbia government announced it will introduce a harmonized sales tax (HST) beginning July 1, 2010. This new tax would replace the GST (5%) and the current provincial sales tax (7%) with a harmonized tax of 12%.

While many business groups are applauding this move, an HST in B.C. will have a devastating impact for the province’s 12,000 restaurants, bars and caterers. Here’s why:

•At present, restaurant meals are only subject to the 5% GST (no PST). Starting next July, your customers will be forced to pay more than double the current tax whenever they order a meal from your restaurant.
•As if a 12% tax isn’t enough of a disincentive to dine out, customers will find comparable products at grocery stores even more attractive once the HST is in place. That’s because the HST is applied on the GST tax base, which treats food differently depending on where it is purchased. If you sell a pizza, you will have to charge your customers HST – but frozen pizzas sold at the grocery store will be HST-free.
•The last time a new tax was added to restaurant meals – the 7% GST in 1991 – foodservice sales across Canada dropped by more than 10%. According to Ernst and Young, nearly three-quarters of this drop – 7.3% – was due to the GST.
•When you add it all up, an additional 7% tax on meals will cost the industry $750 million each year in lost sales, according to CRFA’s econometric model. That’s an annual loss of 7.5% or nearly $50,000 for the average restaurant in the province.
•Many are touting input tax credits as an upside to tax harmonization, but foodservice operators will not benefit from input tax credits in the same way as other businesses. The largest costs for foodservice operators, labour and food, are not eligible for these credits.

It’s still unclear why the government takes actions on the tax, but one thing is for sure, the restaurants will endure a more harsh and colder summer next year.