HST changes art of the car deal

Consumers may benefit even though tax will apply equally to private sellers and dealers

Jan 21, 2010

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Special to the Star

Could the dreaded Harmonized Sales Tax actually lower prices for buyers of dealer-owned used cars? According to some auto industry experts, the answer is yes.

When the 8 per cent provincial sales tax and the 5 per cent federal GST are replaced by a blended 13 per cent value-added sales tax on July 1, private car sales will be subject to a federal tax for the first time in Ontario.

On the surface that may be bad news for consumers, but according to the provincial government companies will save $500 million in compliance costs — money that should, in theory, trickle down and translate into lower prices.

It works like this: A business that collects HST from its customers doesn't have to pass all the money to the government. Instead, using input tax credits introduced with the original GST, the dealer can deduct the HST paid on the products and services it purchases. Businesses only have to pay HST on the net amount gained in the transaction. The overall effect is to lower the sales tax charged to businesses.

"It represents an extra 8 per cent dealers can apply to their business expenses when they do their tax reconciliation at the end of the month," explains Bob Pierce, director of member services, Used Car Dealers Association of Ontario (UCDA). "That makes it easier to do business."

A skeptical public may be correct to guffaw at the notion dealers will be keen to pass along their tax savings. Except that when it comes to the car business – located in one of the most competitive markets in North America – it may actually materialize, says Ken Shaw Jr., one of the dealer principals at Ken Shaw Lexus Toyota.

"Everybody is trying to sell their cars for the lowest possible price," he says, suggesting that super-heated competition will compel Toronto-area dealers to direct any savings to the showroom floor. "Funny, but it's the same $1,000 profit we're trying to make today on a $25,000 car as we were when we were selling cars for $5,000 some 30 years ago."

In addition to potential savings and the streamlining of tax administration for dealers, the HST will impinge on private auto sales and notorious curbsiders. By spreading the sales tax equitably to all car sales, dealers believe one of the advantages of buying privately will vanish and more customers will shop their showrooms.

"We hope people will see the protection offered by buying from a dealer versus the private seller," says Pierce.

George Iny, president of the pro-consumer Automobile Protection Association, suggests the tax change is a two-edged sword for private buyers and sellers.

"It removes a significant incentive for buying from a private seller. And it will increase the cost of a used-vehicle transaction between legitimate private individuals."

At the same time, the imposition of the mandatory tax will affect curbsiders, who sell multiple vehicles from their home while posing as private sellers.

"Presumably some of them will look for other ways to avoid tax when selling a used vehicle, but it will make the reselling of more expensive late-model used vehicles by fake private parties less attractive," says Iny.

"The curbsider phenomenon will be really hurt by this tax," predicts Shaw.

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