Chapter 5 - Industry specific audit issues

On this page

• Section 5A - Accommodation providers
• Section 5B – Aircraft, airlines and airline industry
• Section 5C – Aquaculture
• Section 5D – Boats and ships
• Section 5E – Cement and concrete
• Section 5F – Design consultants
• Section 5G – Farming
• Section 5H – Film and television
• Section 5I – Fishing
• Section 5J – Forest industry (logging, pulp mills, sawmills)
• Section 5K – Large Retailers
• Section 5L – Legal services industry
• Section 5M – Liquor sellers
• Section 5N – Manufacturing
• Section 5O – Mining industry
• Section 5P – Oil & gas industry
• Section 5Q – Photographers
• Section 5R – Railways
• Section 5S – Telecommunications
• Section 5T – Trucks
• Section 5U – Vehicles

Section 5A – Accommodation providers

Issued: 2014/02; Revised: 2019/06/15

The following are some of the common risk areas related to the accommodation provider industry. This is not an exhaustive list.

Audit risk areas – Provincial sales tax (PST)

Sales tax application and rates

In addition to providing lodging, an accommodation provider may have other sources of taxable and non taxable revenue. Other sources of revenue may include:

• Restaurant
• Banquet and conference facilities
• Sale of goods
• Spa
• Parking

Identify the various sources of revenue to determine if tax applies and the applicable rate of tax by doing the following:

• Touring the business premises
• Discussing the nature of the business with management
• Reviewing the accommodation provider’s trial balance and internal financial statements

The most common taxable item sold in restaurants, banquet, and conference facilities is liquor. Liquor can also be sold in mini bars. Some hotels offer accommodation on a separate floor at a higher rate for guests purchasing premium services (such as gold floor or club room). Liquor is often served in a designated lounge area for the gold floor or club room customers.

When conducting liquor audits, keep in mind that the liquor mark up will differ depending on where the liquor is sold. For example, a restaurant’s markup may be greater than a banquet facility’s. It is also important to look for significant use of liquor for cooking. For further information on liquor audits, see Section 5M, Liquor sellers.

Accommodation providers may sell taxable goods in retail shops, spas, and banquet and conference facilities.

As accommodation providers may have more than one source of revenue, different tax rates can apply in relation to a single business:

• 8% on the purchase price of accommodation (Provincial Sales Tax Act (PSTA) section 122) 
• Up to 3% (municipal regional district tax (MRDT)) on the purchase price of accommodation, if purchased in a designated accommodation area (PSTA section 123). (The maximum rate changed from 2% to 3% effective September 1, 2015) 
• 10% on the purchase price of liquor (PSTA subsection 34 (2))
• 7% on the purchase price of goods (tangible personal property) (PSTA subsection 34 (1)) and telecommunication services

It will be necessary to segregate tax collected by source of revenue to complete audit procedures for the tax account. Segregating taxes by source of revenue will also be required for liquor audits to correctly identify tax collected on liquor sales for the variance analysis (see Section 5M, Liquor sellers.)

No-show revenue

When a customer makes a reservation for lodging, some accommodation providers allow the customer to guarantee the reservation. Usually the customer must provide credit card information to obtain this guarantee. The guarantee is that a room will be available to that customer no matter how late the customer checks in. If the customer does not check in and does not cancel the reservation per the accommodation provider’s cancellation policy, the accommodation provider may charge the customer for one night of accommodation. Any charge for one night of accommodation is subject to PST as an amount paid for accommodation. Unless an exemption applies, it is subject to PST and any related MRDT, which under PSTA section 179 the accommodation provider must collect. It is considered a sales application error if the accommodation provider does not collect the PST and MRDT (see section 1 definition of accommodation and PSTA sections 19, 122, and 123).

Forfeited deposits

Guests may provide an accommodation provider with a deposit to reserve a room. The deposit is not subject to PST or MRDT until the accommodation provider uses the deposit as consideration for something taxable. If the guest cancels the reservation and the deposit is not used for anything taxable, the deposit is not subject to PST or MRDT in any case.

Some accommodation providers collect PST and MRDT (if applicable) on deposits. Some accommodation providers retain PST and MRDT paid on forfeited deposits. Even though the tax was collected in error, the taxes must be remitted to the Minister of Finance (PSTA subsection 179 (3)).

Accommodation provided at no charge

An accommodation provider may at times provide accommodation at no charge to persons performing a service for the hotel. Because the barter of accommodation for another service is a 'sale' for the purposes of PST, the accommodation provider is required to self-assess and remit PST on the lowest price of the room during that season. In order to determine the lowest price for the season, a report can be printed by the taxpayer from its guest folio accounting system.

Regional destination marketing fees and other similar charges

The destination marketing fee is collected by hotels that are members of the Vancouver Hotel Destination Association to fund marketing of the industry. This is not administered by the provincial government. The fee is remitted to the Association by its hotel members. This is considered part of the purchase price of the accommodation; therefore, it is taxable.

Accommodation provided with meals

When accommodation is sold with meals for a single price, the purchase price of the accommodation is determined based on various specific rules. See PSTA section 1 and Provincial Sales Tax Regulation (PSTR) section 4 for definition of meals. See PSTA subsections 26 (5) and (6), and PSTR section 11 for rules that determine the purchase price.

Once the purchase price of the accommodation is determined, PST and any applicable MRDT are charged on that purchase price.

Accommodation provided with meals and services

When accommodation is sold for an all inclusive price that includes meals and other services, the purchase price of the accommodation is determined based on specific rules. See PSTA section 1 and PSTR section 4 for definition of meals. See PSTA subsection 19 (3) and PSTR section 8 for rules that determine the purchase price.

Capital assets and operating expenses

In larger hotel operations, the hotel operator may not be the owner of the hotel. For example, a legal entity purchases a hotel as an investment and has a contract with a separate legal entity to operate the hotel, meaning there are two separate legal entities that may be subject to audit. For example, the hotel operator and the owner of the hotel may have each purchased capital assets for the hotel operations. 

There are more complex situations such as where there are three legal entities involved in a hotel; a management company, hotel operator, and the hotel owner. For example, the management company may be purchasing software and promotional materials for a group of hotels, and the software and promotional materials may be recorded in the management company’s own separate general ledger.

It is important when interviewing the staff about the business to determine the entity that is the legal owner of the hotel, and whether there are separate legal entities operating and managing the hotel. Another way to determine this information is by reviewing the trial balances. There may be separate accounts for transactions between the legal entities.

Changes in legislation

Effective October 1, 2018, accommodation includes lodging provided in a residential dwelling if the dwelling is listed on an online platform or an online marketplace that would be an online platform if the residential dwelling was otherwise considered to be accommodation under the PSTA. Also effective October 1, 2018, the exemption that applies to accommodation sold by a person who offers fewer than four units of accommodation is eliminated; instead, there will be an exemption that applies to accommodation sold by a person whose actual and estimated 12-month revenue is $2,500 or less.

As a result of these changes, there may be unregistered vendors of accommodation and the continued application of a repealed exemption.

References

Bulletin PST 120 -  Accommodation (PDF, 414KB) (PSTA)

Section 5B – Aircraft, airlines and airline industry

Issued: 2014/02; Revised: 2019/06/15

The following are some of the common risk areas related to this industry. This is not an exhaustive list.

Audit risk areas - General

One of the first things to determine is whether an aircraft is turbine powered or non turbine (piston) powered.

Audit risk areas - Provincial sales tax (PST)

Turbine powered aircraft (jets, turboprops and most helicopters) 

There is a PST exemption associated with turbine powered aircraft regardless of whether the aircraft is used commercially or privately. Turbine powered aircraft and parts for those aircraft are exempt from PST (Provincial Sales Tax Exemption and Refund Regulation (PSTERR) section 55 (1) (c)). This exemption applies to accessories that are installed in or attached to the aircraft when the claimant purchases or leases the aircraft or begins using it in B.C. Accessories obtained afterward do not qualify for this exemption.

Non turbine aircraft (piston airplanes and helicopters, and gliders)

Most non-turbine aircraft are generally subject to PST. Some can be subject to proportional PST as conveyances used interjurisdictionally (Provincial Sales Tax Act sections 59 – 67).

Airline industry 

A person operating a commercial airline on interprovincial or international flights is exempt from paying PST on tangible personal property obtained for use during the airline's interprovincial or international flights by an airline’s passengers or by the airline in serving its passengers (PSTERR subsection 55 (2)).

Audit risk areas - Motor fuel tax (MFT)

Float planes do not qualify as ships. 

Jet fuel is exempt from MFT if it is used in a flight operated by a commercial air service that is provided to members of the public for a fee (for the transportation of passengers or goods). The exemption does not apply to flights between two points in B.C. or to flights that connect B.C. with another point in Canada. The exemption only applies to flights that begin in B.C. and end outside Canada and flights that begin outside Canada and end in B.C. A flight means a trip between the takeoff and landing of an aircraft, whether or not the trip is a portion of a longer route. (Motor Fuel Tax Regulations (MFTR) section 2.4; refunds authorized under MFTR section 4.4.)

Using coloured fuel in an aircraft is not authorized under section 15 of the Motor Fuel Tax Act (MFTA). If the fuel is not taxed at the clear gasoline tax rate, the taxpayers can be assessed for the difference between the clear and colour rates, and also penalized the greater of three times the tax and $1,000. See MFTA section 45.3 and MFTR section 15.51. Non turbine powered aircraft, such as piston-powered float planes operating in remote locations, sometimes use coloured gasoline where aviation fuel is not available. Despite any remoteness that may lead to such a choice, the prohibition against the use of coloured fuel, and the availability of the aforementioned assessment and penalty, continue to apply.

If clear gasoline other than aviation fuel is used in non turbine powered aircraft, no refund is available because such fuel is not aviation fuel.

Kerosene used in a turbine powered aircraft should be assessed at the clear gasoline tax rate if it does not meet the definition of jet fuel.

References

Tax Interpretation Manual (TIM)
Motor Fuel Tax Act, Section 7, Tax on jet fuel, and Section 8, Tax on aviation fuel

Audit risk areas - Carbon tax (CT)

Airlines may register to purchase fuel exempt from CT provided certain conditions prescribed by regulation are met. CT must be self assessed on the proportion of fuel used for travel from a point of departure in B.C. to a destination in B.C. and remitted using the carbon tax return by the 15th day of month following the use. 

Airlines must register to purchase fuel exempt. If they do not qualify for registration, they must pay or self assess CT on the volume of fuel used in B.C. and apply for a refund on the portion used outside B.C.

References

Bulletin MFT-CT 004, Registered Consumers (PDF, 139KB) (MFTA and CTA)
Bulletin CT 005 - Commercial Air or Marine Services (PDF, 286KB) (CTA)
FIN 105 - Registered Air Service or Marine Service Carbon Tax Return (PDF, 354KB)
FIN 123 - Application for Registration as a Registered Air Service (PDF, 356KB) 
FIN 171 - Non-Registered Air or Marine, Carbon Tax Refund Application/Return (PDF, 515KB)

Section 5C – Aquaculture

Issued: 2014/02; Revised: 2019/06/15

The following are some of the common risk areas related to the aquaculture industry. This is not an exhaustive list.

Note: The exemptions apply only to specific prescribed items in Provincial Sales Tax Exemption and Refund Regulation (PSTERR) Schedule 4, if used solely for an aquaculture purpose.

Audit risk areas - General

Farm status

Aquaculturists may also qualify as farmers if they own or lease land classified as a farm under the Assessment Act of BC. Hatcheries and smolt pens are most often situated on farm land. Fish farms may be attached to a foreshore lease which is not farm land. Farm status may be verified by reviewing the annual property tax assessment. The rural property tax notice should indicate farm in the property class box.

Records and tour of premises

At the beginning of the audit, request a tour of a hatchery site, fish farm, and processing plant, if applicable. The auditor should request the following documents: 

• A list of boats, including details of location, length, use, and registration number; 
• A list of farm and hatchery sites, specifying what each site is used for (such as sea farm, hatchery, saltwater, freshwater); and 
• The chart of accounts, including account codes

Purchases

A seller who grants the exemption available under section 49 of the PSTERR must obtain the required exemption documentation (FIN 456) from the purchaser or lessee and ensure that the TPP is described in Schedule 4 of the PSTERR or it is a part described under PSTERR 49(1).

Generally, it is branch policy to raise a lead on the supplier and not assess the purchaser if these criteria weren't met at the time of sale.

The exemptions are available under PSTERR section 46 (for farmers) and section 49 (for aquaculturists). Neither exemption applies to standard nuts, bolts, screws and other parts suitable for replacement or repair use by reason only of the general nature of the part's design and manufacture.

Exemptions for aquaculturists and commercial fishers are not interchangeable.

Purchases of raw materials

Purchases of raw materials to construct otherwise exempt goods are not exempt. For example, a fish tank would qualify for exemption but materials to construct the tank would not.

Electricity refunds

Aquaculturists who qualify as farmers may apply for a refund of PST paid on electricity the aquaculturist obtains solely for a farm purpose. Aquaculture hatchery sites that qualify as farm sites often include accommodation for employees. Electricity obtained for use in bunk houses does not qualify for this exemption.

Tangible personal property for aquaculture purpose (PSTERR Schedule 4)

Use the internet to research items on the prescribed list if items are not recognized or understood. The auditor can often find pictures and descriptions. Some suppliers’ websites are helpful. The Tax Interpretation Manual (TIM) provides explanations for some of the items listed in PSTERR Schedule 4.

Proration of sampling errors

In situations where errors were noted in the selected sample, the auditor needs to discuss the basis for proration with the audit contact. It is important to note that the cycle from egg to harvested fish can be more than one year; therefore, sampling period may require longer than the typical one year in the audits of other industries. Kilograms of fish sold or kilograms of fish in inventory can be the most reasonable basis for proration (proration on either basis should take into account any material fish loss (from death, etc.) during the audit period). Supporting documentation is required.

Capital assets

Aquaculturists often keep separate binders for each capital project, including the invoices and purchase orders.

Aquaculturists are often multi-national companies, purchasing capital assets from the country where the head office is located. Audits of such companies should include steps for identifying non-exempt items obtained outside B.C. and on which no PST has been self-assessed.

Boats

The exemption available under PSTERR 49 can apply to a boat not exceeding 20 metres in length. The boat must be obtained by a qualifying aquaculturist and for use solely for an aquaculture purpose, which does not include transporting staff between farm and other work sites.

Taxable items:

• Cranes (these are different from booms, which are exempt)
• Fish counters
• Fish elevators
• Feeder stands, if purchased separately from automatic feeders
• Cameras for automatic feeders
• Pescalators
• Pulleys
• Replacement o rings, other than ones that meets the definition of 'qualifying part' under PSTERR 49(1)
• Scales
• Seine nets
• Vaccinating equipment, including vaccinating needles and spare cylinders (these are exempt for farmers)

Integrated business

Aquaculture companies are often related to companies that own fish processing plants. The processing plants, even if they only clean, gut, and package the fish may qualify as manufacturers.

Audit risk areas - Motor fuel tax (MFT)

Under MFTR 15.4, an aquaculturist who is a farmer for the purposes of motor fuel tax can claim an exemption from paying MFT on coloured fuel, and a refund of MFT the aquaculturist has paid on coloured fuel, subject to the requirement of that section. MFTA 5 authorizes use of coloured fuel in stationary and portable engines, including those used in aquaculture.

Audit risk areas - Carbon tax (CT)

Aquaculturists pay the carbon tax unless an exemption applies.

Relevant bulletins and notices

Bulletin PST 103 - Aquaculturists (PDF, 325KB) (PSTA)
Bulletin PST 101 - Farmers (PDF, 387KB) (PSTA)
Bulletin PST 108 - Boats (PDF, 332KB) (PSTA)

Section 5D – Boats and ships

Issued: 2014/02; Revised: 2019/06/15

A boat is a vessel or other craft that is designed for transporting or drawing on water persons or things, regardless of the method of propulsion or lack of method of propulsion (section 1 of the Provincial Sales Tax Act (PSTA)). Boat purchasers may include boat charterers who provide skipper services to customers, individual and corporate customers who purchase boats for their own use, commercial fishers and aquaculturists.

These are some of the common risk areas to this industry under the PSTA. This is not an exhaustive list.

Audit risk areas - Provincial sales tax (PST)

Sales tax rates and taxable amount

PST applies to boats purchased, leased or received as a gift for use in B.C. unless a specific exemption applies. The tax rate is 7% or 12%, depending on how the boat is acquired. The purchase price of a boat includes the consideration payable by the purchaser for goods attached or intended to be attached to, stored in or used in connection with operation of the boat (motors, water sports equipment, and fishing gear) (PSTA sections 10 (2) (f.1), 34 and 36). The purchase price of a boat that is purchased outside B.C. and enters B.C. more than 14 days after the date of the purchase may be eligible for depreciation. The following table lists applicable PST rates. 

Purchased, leased, or gifted	PST rate
Purchased at private sales in B.C.	12% of purchase price
Purchased at private sales outside B.C. but within Canada and brought into B.C.	12% of purchase price
Purchased in B.C. from GST registrant	7% of purchase price
Purchased outside B.C. but within Canada from GST registrant and brought into B.C.	7% of purchase price
Purchased from outside of Canada and brought into B.C.	7% of taxable value determined under Excise Tax Act (Canada), including all landing costs for personal use vessels. 7% of purchase price if the vessel is for commercial use.
Leased in B.C. (refund available for portion of the lease if used outside BC)	7% of lease price
Leased from outside B.C. and used in B.C.	7% of lease price based on the number of hours the boat is in B.C. during the rental period
Received as a gift in B.C. from a non GST registrant	12% of fair market value (FMV) on the date of receipt
Received as a gift outside B.C. but within Canada and brought into B.C.	12% of FMV on the date the boat enters B.C.
Received as a gift from outside Canada	7% of FMV on the date the boat enters B.C. If Canada Border Service Agency (CBSA) collects the tax then it will be 7% on the taxable value determined under Excise Tax Act (Canada). Note that in accordance with PSTA section 54 the CBSA should not collect PST on a boat obtained as a good for commercial use.
Received as a gift from a GST registrant as taxable supply under the Excise Tax Act	7% of the FMV on the date of receipt or entering into B.C.
Received as a gift in B.C. from a registered charity that is a GST registrant as an exempt supply under the Excise Tax Act	7% of the FMV

The depreciated purchase price of a boat is calculated in accordance with Provincial Sales Tax Regulation (PSTR) section 10. Refer to PSTA section 1 and PSTR section 3 for the determination of FMV.

PST is also payable on consignment sales. The auditor is to verify the completeness of reported sales (for example reconcile reported sales to banking records).

Interjurisdictional conveyances (defined in PSTA section 59)

Conveyances can be subject to PST based on the ratio of use of the conveyance in B.C. to the total usage of the conveyance. PST is initially due on the purchase or lease price of the conveyance based on the estimated ratio of B.C. usage to total usage for a period. The estimated ratio is compared to the actual ratio of B.C. usage to total usage at the end of the period. If the actual ratio of B.C. usage is more than estimated, the person must self-assess additional PST; if less, the person may be eligible for a partial refund (PSTA sections 60 and 62-66). Special rules apply to a vessel sold then leased back immediately by the seller from the purchaser if the seller had, before the sale, paid an applicable tax (for example tax on designated property (TDP), social service tax (SST) or the B.C. provincial portion of the harmonized sales tax (HST) on the initial purchase (PSTA sections 61 and 61.1)). 

Trade-ins

The purchase price of a boat purchased at a sale in B.C. can be reduced by a trade-in credit the seller grants for any tangible personal property (TPP) used as consideration to pay for the boat, if the purchaser paid, or was exempt from paying, an applicable tax on the TPP. PST trade-in rules do not apply to the purchase price of a boat purchased outside B.C. or to a lease price. The auditor is to verify the eligibility for the PST reduction (such as original bill of sale, lease documents, self assessment voucher from the ministry).

Boats obtained for chartering

• Unless an exemption applies, PST applies to any boat obtained for use in B.C., including for chartering. 'Use' excludes the storing, keeping or retaining of a boat solely for resale
• A boat owner who obtains a boat solely for resale or for an exempt use and claims exemption from paying PST on the boat must self-assess PST on the boat if the owner makes non-exempt use of the boat (for example by using it for pleasure and not for lease to another person). The owner's purchase price of the boat may be eligible for depreciation. The auditor is to review the next PST return to verify the self assessment
• A person who obtains a boat solely for lease to other persons and occasionally for supply with an operator and who capitalizes the boat as lease inventory can claim exemption under PSTA section 142 from paying PST on the person's purchase or lease price of the boat. Whenever the person supplies the boat with an operator, the person must self-assess PST on the lease price the person would have charged had the person leased the boat instead of supplying it with an operator
• Verify the use of the boat (for example the original boat log to verify parties using the boat, whether the boat was leased to the owners, employees or other related parties at FMV, purposes and destinations of trips, etc.)

Boats obtained outside B.C.

• There is a risk of unpaid PST whenever a B.C. resident obtains a boat outside B.C. for use in B.C. Most boat sales outside B.C. are non-taxable; in most cases, a B.C. resident's use of a boat in B.C. is non-exempt. The auditor is to review the boat log and check for entries into B.C., and review insurance documents for restrictions on where the ship is stored and used
• If brought into B.C. more than 15 days after its purchase, depreciation may be applicable (PSTA sections 1 and 25; PSTR sections 3 and 10) in calculating the purchase price of the boat. Depreciation rate is 15% for each year the taxpayer has used the boat, and 1.25% for each 30-day period in a partial year that the taxpayer used the boat
• When a non-resident (defined in PSTA section 1) brings a boat into B.C. solely for non-business purposes, the boat is exempt from PST if the non-resident is an individual. The auditor must verify non resident status (for example if the individual has a medical services plan (MSP) card from another province, or if they own real property within B.C. and have claimed a Home owner grant (HOG) on their principal residence). Auditors should consult with their manager about requesting information from MSP or HOG
• Parts purchased in B.C. or brought into B.C., and services performed in B.C. for use by non-residents are taxable, even if the boat was brought into B.C. exempt from PST (PSTA section 52)

Boats acquired in B.C. but delivered outside B.C. by the seller

A purchaser of a boat in B.C. is exempt from paying PST on the boat if the seller ships the boat for delivery outside B.C. and the purchaser makes no use of the boat while it is in B.C. other than by storing it with the seller. An auditor of a seller who grants this exemption should obtain documentation which shows that the seller, not the purchaser, shipped the boat out of B.C., such as a shipper's invoice and bill of lading.

Boats brought into B.C. by new residents

• An individual who becomes a B.C. resident (for the first or any subsequent time) can claim exemption under PSTERR section 22 from paying PST on a boat if the boat enters B.C. solely for a non-business purpose and within one year before or after the date the individual becomes a B.C. resident, and if, on the date the individual becomes a B.C. resident, the individual owns the boat and has owned it for a continuous period of at least 30 days
• The auditor must establish date of residency and boat ownership (review B.C. medical services plan enrolment, the taxpayer’s vehicle registration, driver’s licence, boat registration, boat bill of sale)

Boats received as gifts

• PST applies to the fair market value of boats received as a gift, unless a specific exemption applies. The tax rate is either 7% or 12%, depending on if GST has been paid or collected (refer to Sales Tax Rates and Taxable Amount above, PSTA section 100, PSTERR section 23)
• Gifts to related individuals: There is no PST on a boat received as a gift from a related individual who has paid one of the applicable taxes on the boat, was exempt from an applicable tax, or received the boat as gift in B.C. prior to April 1, 2013. Section 18(4) of the PSTERR prevents the exemption from applying if the donor received the boat during the 12 months before donor’s gift of the boat to the related individual and claimed exemption under PSTERR section 18 on the boat, unless the donor received the boat from the related individual. For the definition of a related individual refer to PSTA section 1. The auditor is to review the gift letter with proof that the donor paid an applicable tax, was exempt from an applicable tax, or received the boat as a gift in B.C. prior to April 1, 2013 (PSTERR section 18)
• Other possible exemptions, which typically require the boat to have a tax paid status:
  • Donations to registered charities (PSTERR section 19)
  • Prizes, draws, and awards (PSTERR section 20)

Related party asset transfers

A full exemption can apply to a boat transferred between related corporations; a full or partial exemption can apply to a boat transferred to a corporation by a person other than a related corporation. See Part 9 of the PSTERR.

Qualifying commercial fishers and qualifying aquaculturists

• A qualifying aquaculturist or fisher can claim exemption from paying PST on a qualifying boat, qualifying parts for such a boat and related services provided to such a boat (PSTERR sections 48, 49, 75, and 76)
• 'Qualifying part' excludes items suitable for use as parts by reason only of the general nature of the item's design and manufacture
• PST a person paid on boats, parts, and related services the person purchased or leased within a certain time frame prior to becoming a qualifying commercial fisher or aquaculturist can be eligible for a refund (PSTERR section 130 and 131)

Boats over 500 tons gross

• A self-propelled vessel of more than 500 tons gross is exempt from PST, under PSTERR section 55. A part designed and obtained for use to repair or recondition such a boat is exempt, under PSTERR section 55
• Ships stores are exempt from tax if delivered to vessels that normally operate in extraterritorial waters (PSTERR section 42)

Boats for logging

The exemption available under PSTERR section 104 can apply to boats obtained for qualifying use in booming and other qualifying activities.

References

Bulletin PST 102 - Commercial Fishers (PDF, 322KB) (PSTA)
Bulletin PST 103 - Aquaculturists (PDF, 325KB) (PSTA)
Bulletin PST 108 - Boats (PDF, 332KB) (PSTA)
Bulletin PST 210 - Related Party Asset Transfers (PDF, 663KB) (PSTA) 
Bulletin PST 301 - Related Services (PDF, 462KB) (PSTA)
Bulletin PST 306 - Goods Brought Into BC by New Residents (PDF, 395KB) (PSTA)
Bulletin PST 309 - PST and Non-Residents (PDF, 489KB) (PSTA) 
Bulletin PST 315 - Rentals and Leases of Goods (PDF, 507KB) (PSTA)

Audit risk areas - Motor fuel tax (MFT)

These are some of the common risk areas to this industry under the Motor Fuel Tax Act (MFTA). This is not an exhaustive list.

Motor fuel tax rates

Boats and ships are authorized to use coloured fuel and pay MFT at 3 cents per litre (MFTA sections 5 and 15).

Fuel purchased outside B.C.

If fuel for a boat is purchased outside B.C. and shipped into B.C. without MFT, the auditor is to verify fuel purchase details to ensure that MFT is self assessed on the fuel. An exemption from the MFT is provided for fuel that is brought into B.C. in the supply tank or in a supplemental supply tank of a vessel if the fuel is to be used in the operation of the vessel (MFTA section 2).

Marine diesel fuel versus marine bunker fuel

Marine diesel fuel, which is subject to MFT at $0.03 per litre (unless an exemption applies), is diesel fuel, or a combination of fuels including diesel fuel, that is used in a ship as fuel for an internal combustion engine, and has a viscosity of lower than 10 centistokes (CST) when measured at a temperature of 50°C or has a viscosity of 10 CST or higher when measured at a temperature of 50°C but is sold as diesel fuel. Effective April 1, 2018, marine diesel fuel used in interjurisdictional cruise ships and ships prohibited from coasting trade under the Coasting Trade Act is exempt from MFT.

Marine bunker fuel is bunker oil, or a combination of fuels including bunker oil, that is used in a ship as fuel for an internal combustion engine but does not include marine diesel fuel. Marine bunker fuel has a viscosity level of 10 CST or more. Marine bunker fuel is exempt from MFT (MFTA section 11).

Marine diesel fuel with a viscosity higher than 10 CST when measured at a temperature of 50°C is subject to MFT at $0.03 per litre as marine diesel fuel (not marine bunker fuel) if it is sold as diesel fuel. Effective April 1, 2018, such fuel is exempt if obtained for use as marine diesel fuel in interjurisdictional cruise ships and ships prohibited from coasting trade under the Coasting Trade Act. There is the risk of marine bunker fuel being blended and sold as marine diesel at the higher marine diesel rate and the seller pocketing the difference. It is uncommon for vessels to purchase marine bunker fuel that has a viscosity of less than 30 CST. Any sale or purchase of marine bunker fuel that has a viscosity between 10 and 15 CST should be investigated to ensure that the product is in fact marine bunker fuel and not marine diesel fuel.

Marine gas oil exemption for commercial passenger or cargo ships

Marine diesel fuel is exempt from MFT if it is suitable for use in a marine gas turbine engine and it is obtained for use in a marine gas turbine engine that propels a commercial passenger or cargo ship (MFTR section 2.3). If the auditor finds that marine diesel was sold without MFT, the auditor must verify records indicating the purchaser’s name, quantity, name of the ship and why tax was not charged. Marine diesel obtained for use in any other type of marine gas turbine-powered vessel is generally subject to MFT. 

References

Bulletin MFT-CT 003 - Coloured Fuels (PDF, 253KB) (MFTA and CTA) 
Bulletin MFT-CT 005 - Tax Rates on Fuels (PDF, 286KB) (MFTA and CTA)

Audit risk areas - Carbon tax (CT)

These are some significant CT risk areas associated with this industry. This is not an exhaustive list.

Carbon tax rates

Gasoline is taxed at 6.67 cents per litre. Diesel is taxed at 7.67 cents per litre.

Registered marine service

• A person who owns or operates a commercial marine service may purchase fuel exempt from CT when certain conditions are met. Refer to Carbon Tax Act (CTA) section 1 for definitions of registered marine service and registered marine service certificate; and Carbon Tax Regulations (CTR) section 6
• Registered marine service certificate holders can purchase fuel in B.C. exempt from CT. However, they must self assess CT on fuel used in B.C. for portions of trips that connect to ports in B.C
• Many businesses in this category have both interjurisdictional and interprovincial trips, which includes both exempt and non-exempt use of fuel purchased from suppliers inside and outside B.C. They may also have mixed inventories of both non-exempt imported fuel and exempt fuel. The auditor is to verify that the taxpayer has accurate control over the reporting of fuel volume
• The auditor is to ensure all fuel purchased is accounted for. This includes fuel:
  • Purchased in B.C. (exempt and non-exempt)
  • Shipped into B.C. in a supply tank or supplementary supply tank
  • Transferred into a supply tank or supplementary supply tank
  • Stored in multiple facilities
• Supporting documentation includes purchase invoices, records pertaining to fuel withdrawals or transfers from storage facilities, trip records showing equipment used in territorial waters with departure and destination points, fuel consumption records
• Select a sample reporting period for each type of fuel and review supporting documentation for information entered on the return. Expand the sample if errors are noted
• Obtain or create a list of fuel used for the sample period and summarize the volume of each type of fuel used inside and outside B.C., the applicable tax rate and CT due. Test a sample of source documents to verify that for each type of fuel the number of litres is accounted for and included in the volume reported for the period. Ensure the CT paid has been calculated correctly on the fuel type at the applicable rate
• Where records are inadequate to substantiate the volume of fuel used, use your judgment to determine a correct volume of fuel based on available information. Propose an assessment for CT on the amount of fuel not accounted for on the tax returns
• Where an incorrect rate of tax has been paid on fuel, propose an assessment for the amount of CT owing from the difference in tax rates

References

Bulletin MFT-CT 003 - Coloured Fuels (PDF, 253KB) (MFTA and CTA)
Bulletin MFT-CT 005 - Tax Rates on Fuels (PDF, 286KB) (MFTA and CTA)
Bulletin CT 005 - Commercial Air and Marine Services (PDF, 162KB) (CTA)
FIN 112 - Carbon Tax Return -  Self Assessors (PDF, 350KB)
FIN 105 - Carbon Tax Return -  Registered Air Service or Marine Service (PDF, 354KB) 
FIN 171 - Refund Application/Return - Carbon Tax - Non-Registered Air or Marine (PDF, 515KB) 
FIN 155 - Application for Registration as a Registered Marine Service (PDF, 344KB)

Section 5E – Cement and concrete

Issued: 2014/02; Revised: 2019/06/15

The following are some of the common risk areas related to the cement and concrete industry. This is not an exhaustive list.

Audit risk areas - Provincial sales tax (PST)

Application of PST

The delivery of ready mixed concrete by the seller’s vehicles to the job site is not considered a service to real property; it is a sale of tangible personal property.

Environmental levies

Environmental levies are administered by industry stewardship programs. The province has no involvement in these programs. Environmental levies form part of the total purchase price of the goods sold and are subject to PST if the goods themselves are subject to PST.

Production machinery and equipment exemption

Risks pertaining to qualifying production machinery and equipment (PM&E) used in the cement industry are generally the same as those pertaining to qualifying production machinery and equipment used in manufacturing and other industries. See Section 5N, Manufacturing for information about audit risk areas for manufacturers.

Below is a discussion of the unique aspects of the PM&E exemption pertaining to the ready mix concrete industry.

The vehicle used to deliver the ready mix concrete to the job site includes a drum and attachments. Part of the manufacturing of the product takes place on route to the job site. The truck on which the mixer drum is mounted does not qualify for the PM&E exemption (Provincial Sales Tax Exemption and Refund Regulation (PSTERR) section 114 (b)). The drum and other parts of the delivery system may qualify for the PM&E exemption.

In cement plants, the manufacturing process occurs inside a massive rotating kiln. Everything attached to the kiln (including trunnions) as well as all the materials used inside the kiln (including steel shredding balls and refractory bricks) qualify for the PM&E exemption.

Sale of concrete to farmers

As concrete is not on the prescribed list of exempt products for farmers, the application of PSTERR section 46 to concrete is a sales application error. See Section 5G, Farming for more information.

Sale of concrete to real property contractors

Usually a sale of concrete to real property contractors is non-exempt, and the real property contractor is the purchaser required to pay the applicable PST. 

Audit risk areas - Motor fuel tax (MFT)

Section 4 of the Motor Fuel Tax Regulation provides for a clear-to-colour refund of MFT paid on clear fuel used in qualifying operation of a stationary engine. 

If a business being audited has received such refunds during the audit period, the auditor should determine whether any of the claimed litres were used for a non-qualifying purpose. This can be done by obtaining and examining the following for a test period:

• Fuel invoices
• List of vehicles
• Refund documents
• General ledger printouts of the fuel accounts

Audit risk areas - Carbon tax (CT)

A manufacturer that produces cement may burn tires in the manufacturing process. The taxpayer is required to self assess carbon tax on their use of tires (combustibles).

Relevant bulletins

Bulletin PST 101 - Farmers (PDF, 387KB) (PSTA)
Bulletin PST 136 - Concrete (PDF, 264KB) (PSTA)
Bulletin PST 302 - Delivery Charges (PDF, 400KB) (PSTA)
Bulletin MFT 002 - Motor Fuel Tax Refunds for Purchasers (PDF, 338KB) (MFTA)
Bulletin MFT 013 - Refunds for the Ready-Mixed Concrete Industry (PDF, 318KB) (MFTA)
Bulletin MFT-CT 004 - Registered Consumer (PDF, 139KB) (MFTA and CTA)
Bulletin MFT-CT 005 - Tax Rates on Fuel (PDF, 286KB) (MFTA and CTA)
Bulletin MFT-CT 006 - Self Assessing Motor Fuel and Carbon Tax (PDF, 195KB) (MFTA and CTA)

Section 5F – Design consultants

Issued: 2014/02; Revised: 2019/06/15

Overview

Design consultants provide professional services and may include engineers, architects, graphic designers, interior designers, website designers, and landscape designers.

The following are some of the common risk areas related to this industry. This is not an exhaustive list.

Audit risk areas - General

Tangible personal property (TPP) incidental to the provision of professional services (Provincial Sales Tax Regulation (PSTR) section 7)

If the purpose of the contract is for the provision of non-taxable professional design services and TPP is supplied along with the services, the supply of the TPP may be merely incidental to the provision of the services. TPP supplied along with professional design services is incidental only if the requirements of section 7 of the PSTR are met. In such a case, there is no sale of TPP. PST therefore does not apply to the TPP. (PST does not apply to the services either, because they are non-taxable.)

For example, engineers and architects may provide blue prints and graphic designers may provide a graphic design to their customers. The first final version of an original blue print or an original graphic design provided to the customer as part of a contract for professional services is not a sale of TPP. A subsequent supply of a blueprint or design for a price is a sale of TPP.

Another example, under a contract for non-taxable professional services (such as interior design services), a design consultant supplies a presentation board to show the concepts developed. The fundamental and overriding objective of the contract is for the acquisition of the interior design services, not the acquisition of the presentation board. 

The consultant does not charge a separate price for the presentation board. The supply of the presentation board did not have a material impact on the total amount of consideration payable by the customer (for example the price would have been the same, or only marginally different, if the presentation board had not been supplied). Because all of the conditions in PSTR section 7(2)(a) have been met, the supply of the presentation board is merely incidental to the contract for the interior design services, and is therefore not a sale of the presentation board.

The consultant charges a separate price for the presentation board. The supply of the presentation board did not have a material impact on the total amount of consideration payable by the customer (for example a separate price was charged for the presentation board, the total consideration payable was still only marginally different from what would have been payable if the presentation board had not been supplied). In this case, while the conditions in PSTR section 7(2)(a)(i) and (iii) were met, the condition at section 7(2)(a)(ii) was not: a separate price was charged for the presentation board. For this reason, the supply of the presentation board is not merely incidental to the contract for the interior design services; it is therefore a sale of the presentation board.

Unless an exemption applies, the design consultant must pay PST on all goods and materials used to fulfill the professional services contract. The consultant may be able to claim exemption from paying PST on TPP that is not incidental to the service, such as TPP obtained solely for resale to the customer or for a use that qualifies the TPP for exemption under Provincial Sales Tax Act (PSTA) section 141.

TPP produced as a result of the design services

If the purpose of the contract is to produce TPP, any amount charged for the design is included in the purchase price of the TPP. For example, if the contract is to produce custom furniture for a customer, the purchase price of the furniture includes charges for the design services, materials, and labour to build the furniture.

Graphic designers

A graphic designer who is a printer or publisher can claim exemption from paying PST on certain goods the designer obtains for use in a printing or publishing process: artwork, cuts, engravings, etc. For a list of eligible TPP, see Provincial Sales Tax Exemption and Refund Regulation (PSTERR) section 40. 

Website designers

Generally, website design and maintenance services are not subject to PST provided they do not include the sale of a telecommunication service or software. 

Improvements to real property

A designer who supplies and installs a design as an improvement to real property does not sell the design to the customer. Therefore, PST does not apply to an amount the designer charges for the design. Unless an exemption applies, the designer pays PST on materials the designer obtains for use in creating the design. The exemption available under PSTA section 141 cannot apply to the materials, because the designer does not sell the design at retail or lease it.

Relevant bulletins and notices

Bulletin PST 501 - Real Property Contractors (PDF, 340KB) 
Bulletin PST 109 - Printers and Publishers (PDF, 282KB)
Bulletin PST 123 - Graphic Designers (PDF, 477KB) 
Bulletin PST 107 - Telecommunication Services (PDF, 441KB)

Section 5G – Farming

Issued: 2014/02; Revised: 2019/06/15

The following are some of the common risk areas related to this industry. This is not an exhaustive list. 

Audit risk areas - Provincial sales tax (PST)

Eligibility

The exemption requirements for qualifying farmers are set out in Bulletin PST 101, Farmers. A qualifying farmer may purchase or lease specifically listed farm equipment or other goods exempt from PST by providing the supplier with either a completed Certificate of Exemption Farmer under the Provincial Sales Tax Act (PSTA), Motor Fuel Tax Act (MFTA), and Carbon Tax Act (CTA), form (FIN 458) or a current B.C. Farmer Identity Card.

Purchases

The farming exemption is limited to the specific items listed in Provincial Sales Tax Exemption and Refund Regulation (PSTERR) Schedule 2. The items are only exempt if they are obtained for use solely for a farm purpose. 
Qualifying farmers can purchase items listed in Schedule 2 (and qualifying parts for such items) exempt from PST. Note that 'qualifying part' excludes any item that is suitable for use as a part by reason only of the general nature of the item's design and manufacture. Schedule 2 is reproduced as Appendix 1 in bulletin PST 101. The bulletin includes a list of goods that cannot qualify for the farmer’s exemption in any case. 

Errors are often made by the seller due to the prescribed nature of the exemption. It is the seller’s responsibility to know whether or not the tangible personal property (TPP) being sold is listed in Schedule 2. If the seller grants the farmer’s exemption for TPP not listed in Schedule 2, the completed exemption certificate or quoted B.C. Farmer Identity Card does not shift the responsibility to the purchaser. However, if the TPP is listed in Schedule 2 but the purchaser claims the farmer’s exemption without qualifying for it, we would generally assess the purchaser rather than the seller. For example, if a purchaser who is not (or is no longer) a farmer claims the farm exemption, we would generally assess the purchaser.

The auditor should review for items purchased exempt even though they are not on Schedule 2 of the PSTERR or, even if they appear on Schedule 2, are not used solely for a farm purpose. This includes goods such as:
•    Horses or accessories used for pleasure or equestrian riding, or by guide outfitters
•    Farm trucks 
•    Lawn and garden tractors
•    Lawn mowers
•    Chain saws and log splitters

Many qualifying farmers operate businesses related to their farming. For example, a greenhouse grower can have a separate produce distribution company, or a poultry farmer can have a poultry processing business. Farm purpose excludes commercial purpose. Therefore, auditors should test for purchases and leases of otherwise exempt goods for a non-farming commercial purpose.

Hay

There are two specific exemptions in the PSTERR that can apply to hay. PSTERR section 45 exempts "feed obtained for use to feed any animal.” For the purposes of that exemption, an “animal” is an animal (a) that is to be sold in the regular course of business, or (b) of a kind the products of which ordinarily constitute food for human consumption. The PSTERR section 45 exemption does not apply to feed purchased for a household pet. However, to obtain feed exempt under PSTERR section 45, the purchaser does not have to be a qualifying farmer. For example, a horse breeder who breeds on land not classified as a farm under the Assessment Act (and who, as a result, is not a qualifying farmer) may purchase hay as feed using the PSTERR section 45 exemption. PSTERR section 46 exempts TPP described in Schedule 2 when that TPP is obtained by a qualifying farmer for use solely for a farm purpose. Hay is described in Schedule 2. Therefore, for example, hay purchased by a qualifying farmer for farm use as animal bedding or for weed control will qualify for an exemption under PSTERR section 46, but not under PSTERR section 45. 

Hay tarps

Because Schedule 2 includes hay tarp, such a tarp can qualify for the farmer's exemption. A multi-use tarp cannot. An auditor who examines a farmer's claim of exemption in relation to a tarp should ensure that the tarp is a hay tarp. Note that the smallest size hay tarp is much bigger than 36 feet by 12 feet.

Fertilizer

The exemption for fertilizer in PSTERR section 47 only applies when fertilizer is purchased for an "agricultural purpose, unless the fertilizer is purchased by an individual (an individual may purchase fertilizer exempt for any purpose). Fertilizer purchased by a corporation, society, municipality, corporate partnership or other non individual is subject to PST when it is used for a non agricultural purpose, unless the purchase qualifies for exemption under another provision of the PSTA or the regulations.

To qualify as being used for an agricultural purpose, fertilizer must be applied to the land to enhance the growth of plants, grass or trees. 

Even if a chemical is fertilizer it cannot be exempt under PSTERR section 47 if it is obtained by a person other than an individual for use in treating waste effluent (such use is not use for an agricultural purpose). Any substance that is not fertilizer cannot qualify for exemption under PSTERR section 47 even if it is sold as fertilizer. A seller who grants the PSTERR section 47 exemption in relation to fertilizer is expected to know whether or not the product is fertilizer.

The seller must keep documentation showing the product qualifies as fertilizer, even if the product is sold in bulk and contains no packaging or labelling. If the content of the product is not marked on the package and the seller has no documentation showing the content of the product, the seller must not grant the PSTERR section 47 exemption in relation to the product. 

Farm equipment

Crawler tractors, excavators, and loaders do not meet the definition of a farm tractor. Equipment such as D6H Cat, 626B Backhoe Loader, 525 Skidder, Caterpillar 300 Excavator, and 16H Motor Grader do not meet the definition of tractor. Forklifts, log skidders, backhoes, and other self propelled industrial machinery do not qualify for farm exemption. 

Consumables

Examine a farmer's consumables accounts for the incorrect application of the farmer's exemption. Repair and maintenance of farm equipment usually includes separate amounts charged for hydraulic fluids, oil, anti freeze, etc., supplied into the equipment; such amounts do not qualify for the farmer's exemption. Amounts a service provider charges for consumables used by the service provider in the course of providing a service (such as solvent and cleaners) are included in the purchase price of the service; if the service is provided to equipment exempt under PSTERR section 46, the amounts are exempt, under PSTERR section 74, if the service is purchased by a qualifying farmer.

Building materials

Building materials, other than chick enclosure materials, do not qualify for the farmer’s exemption. When auditing a farm, look for purchases of building materials for barns, out buildings, and even residences. Keep in mind that it is the seller's responsibility to ensure the goods sold to a qualifying farmer are prescribed and that the appropriate exemption documentation is obtained.

Accounting records

If a farmer’s accounting records are incomplete or disorganized, it may be difficult to audit all of the farmer’s transactions. It may be necessary to perform audit procedures using alternative records such as the farmer’s federal income tax returns. It is important to clearly detail and document all the records and procedures used. Incomplete or disorganized records is no basis for preventing the auditor from making a reasonable assessment.

Electricity

Please refer to the section 'Electricity, Heat, Natural Gas and Fuel Oil' in bulletin PST 101.

Innovative clean energy (ICE) fund

The 0.4% tax applies to certain energy products, including those purchased for a farm use.

Audit risk areas - Motor fuel tax (MFT)

In order to be marine diesel fuel, fuel must be used in a ship as fuel for an internal combustion engine. Marine diesel fuel is exempt under Motor Fuel Tax Regulation (MFTR) section 2.3 only if it obtained for qualifying use in qualifying vessels. Fuel sold as marine diesel fuel is not exempt if it is obtained for farm use.

Motor fuel tax act refunds

Under MFTR section 15.4, a farmer who purchases coloured fuel under certain conditions can claim exemption from paying MFT on that fuel. If the conditions are not met, the farmer must pay MFT on the fuel. However, the farmer can apply for a refund of that MFT, subject to MFTR section 15.4(3) and (4).
MFTR section 15.4 does not require the fuel to be used for a farm purpose. However, the fuel must be used for a purpose authorized under MFTA section 15.

Propane

MFT exemptions that apply to propane are found under Part 2.1 of the MFTR. For the purposes of these exemptions, 'farmer' is defined in MFTA section 1 as a person who operates a farm; 'qualifying person' is defined as a person, other than a farmer, who is a "qualifying farmer" as defined in PSTERR section 1.

For the purposes of MFTR section 15.9, "qualifying person" excludes a person described under paragraph (d) of "qualifying farmer". Under certain conditions, a farmer or qualifying person can claim exemption from paying MFT on propane obtained solely for a qualifying farm use or only for residential and qualifying farm use. Qualifying use is more restrictive for qualifying persons that it is for farmers.

Audit risk areas - Carbon tax (CT)

Farmers may purchase coloured gasoline and coloured diesel for authorized uses exempt from CT (prior to January 1, 2014 farmers were only exempt from MFT). A farmer who pays CT on qualifying coloured fuel may apply for a refund.

This exemption from CT applies only to gasoline (CTA section 1) and diesel fuel (Carbon Tax Regulation (CTR) section 1) coloured in accordance with the MFTA. It does not apply to other categories of light fuel oil (including coloured heating oil) or to other fuels, such as propane.

Aside from this specific exemption from CT, farmers must pay CT on gasoline and diesel obtained for a purpose other than a purpose prescribed under CTR section 20.1, on natural gas, propane, heating fuel and coal, and on tires and peat burnt to produce energy or heat. There is no CT on sawdust or wood.

Relevant bulletins and notices

Bulletin PST 101 - Farmers (PDF, 387KB) (PSTA)
Bulletin PST 103 - Aquaculturists (PDF, 325 KB) (PSTA)
Bulletin PST 108 - Boats (PSTA)
Bulletin PST 203 - Energy and Energy Conservation and ICE Fund Tax (PSTA)
Bulletin MFT-CT 003 - Coloured Fuels and Other Substances (MFTA and CTA) 
Bulletin MFT 014 - Propane Exemptions (MFTA)
Bulletin CT-002 - Carbon Tax Refunds for Purchasers (CTA)

Section 5H – Film and television

Issued: 2014/02; Revised: 2019/06/15

Overview    

A production company provides non taxable movie / television production services. A foreign production company is usually only in the province for the duration of the particular film it is producing. If the production accountant will leave the province immediately after the production is completed, the auditor should do the audit before production is complete and the accountant and the records leave B.C. Producing television programs, radio programs, motion pictures, commercials, master films, master video tapes or any similar product in electronic format does not qualify as manufacturing activities (Provincial Sales Tax Exemption and Refund Regulation (PSTERR) Part 5, Division 1 section 90).

Because the production company provides a non-taxable service, the focus of the audit should be on purchases. Audit procedures must include the review of production cost reports that detail the accumulated costs for different purchase categories, including actors, music, film, etc., and suppliers. The main audit contact should be the production accountant as he / she is responsible for maintaining the production cost reports.

Audit risk areas - General

The following are some of the common risk areas related to this industry. This is not an exhaustive list.

Out of province purchases

A production company’s out of province suppliers are often not registered to collect PST. Verify that the production company has self-assessed all PST that applies to its purchases from non-registered suppliers, and from registered suppliers who were not required to collect PST from the company because they did not cause the goods to be delivered in B.C., on its full purchase prices, which must include:

• Out of province fabrication costs
• Freight, customs charges, and brokerage fees at or before the time the goods enter B.C., and 
• All other relevant amounts described under PSTA 10

Goods brought into B.C. for temporary use

The auditor should identify TPP the company brings into B.C. for temporary use and on which it pays PST in accordance with the temporary-use rules found under PSTA 51. The auditor can rely on import and export documents to determine when the TPP enters and leaves B.C.

Product placements

Product placements occur when a supplier provides items free of charge in exchange for advertising placement of the product in a scene. The branch policy has been to follow up with the supplier to ensure PST has been paid or self assessed on such items. Therefore, a lead should be raised on the supplier. Sometimes the production company takes possession of the products outside of B.C. In this situation, the production company must self assess PST on any costs to bring the items into B.C.

Occasional sales

A production company may hold a sale at the end of the production to dispose of used set decorations, props, and wardrobe items consisting mostly of exempt used clothing under $100 (PSTERR section 10). Anything of material value is usually shipped back to the USA. The production company will typically remit the PST on the sales or sell the entire lot to an auction house such as Maynards. The PST collected on such sales is minimal; therefore, a detailed review is generally not required.

Sub producer

A sub producer is a person engaged by the producer to shoot certain scenes or sequences and deliver the original footage to the producer. The sub producer is considered the consumer of all TPP used up to and including the point at which the sub producer furnishes the original film to the producer. A sub-producer who is a commercial photographer can claim exemption under PSTERR 40 from paying PST on film and developing chemicals used to create the footage. Evaluate the risk to determine whether a lead should be raised on the sub producer.

Post production

Determine whether any of the post production work will be performed in B.C. Evaluate the risk and raise a lead if warranted.

Equipment supplied with an operator

Lease excludes an agreement under which the person supplying equipment supplies a person to operate the equipment. Taxable service does not include the service of supplying equipment and a person to operate it. Goods commonly supplied with an operator to production companies include:

• Puppets
• Animatronics
• Animals

Other items that are non-taxable or exempt

The supply of a master recording is not a sale if the recording is provided under a contract with a producer for professional services and it is intended for general distribution of a motion picture production, a television production, a radio production, or a training video or film. An amount charged for such a supply is non-taxable. The supplier is deemed to sell only a non-taxable service (Provincial Sales Tax Regulation (PSTR) section 7 (2) (e)).

A recording of a motion picture or an audio production is exempt (PSTA section 143) if it is obtained for the purpose of:

• Public broadcast by a licensed radio or television broadcaster
• Making copies for public broadcast by a licensed radio or television broadcaster, for public exhibition in a public venue, or for sale or lease
• Copying into another recording of a motion picture or audio production for public broadcast by a licensed radio or television broadcaster, for public exhibition in a public venue, or for sale or lease

The supply of a tangible movie or TV script that is merely incidental to the non-taxable service of writing the script is not a sale. A screenwriter who supplies such a script sells only a non-taxable service.

Kit rentals - These are charges from employees who are reimbursed monthly for use of their own equipment (for example make up artist’s make-up supplies, producer owned vehicle). In some instances, the kit rental is billed to the production company by a corporation owned by the production company’s employee providing the service (employee corporation).

When the production company leases equipment from employee corporation, they also require the services of the employee or owner of employee corporation to operate the equipment. 

In this situation, the employee or owner of employee corporation is still supplied by the employee corporation to operate the equipment, even though they are doing so under a separate contact to satisfy union rules. We cannot artificially separate the TPP (equipment) and the employee or owner of employee corporation in this scenario. 

Generally, for an agreement to be excluded from the definition of taxable lease, the agreement must establish that the onus of providing for the operation of the equipment rests with the equipment owner. Even though the production company pays the employee and pays for the equipment on separate contracts, the commercial reality is that the onus for operating the equipment rests with the equipment owner, employee corporation. Therefore, this is a supply of TPP with a person to operate the TPP, which is not a lease. The rental charge for the equipment is not subject to PST, but employee corporation is generally required to pay PST on the purchase price of the equipment. Note that in some cases the exemption under PSTA 142(4) or (5) can apply.

Relevant bulletins and notices

Bulletin PST 302 - Delivery Charges (PDF, 400KB)
Bulletin PST 315 - Rentals and Leases of Goods (PDF, 507KB)
Bulletin PST 310 - Goods Brought into BC (PDF, 310KB)

Section 5I – Fishing

Issued: 2014/02; Revised: 2019/06/15

The following are some of the common risk areas related to this industry. This is not an exhaustive list.

Audit risk areas – Provincial sales tax (PST)

Provincial Sales Tax Exemption and Refund Regulation (PSTERR) Schedule 3 [Fishing equipment for commercial fishing purposes]

Unlike Schedule 2 for farmers and Schedule 4 for aquaculturists, Schedule 3 for commercial fishers is not exhaustive. Schedule 3 contains items that are exempt; however, items not in the schedule may still qualify for exemption as fishing equipment. Schedule 3 is reproduced as Appendix to Bulletin PST 102, Commercial Fishers.

PSTERR section 48 does not apply to standard nuts, bolts, screws and other parts suitable for replacement or repair use by reason only of the general nature of the part's design and manufacture. Hoses designed as engine parts are PST exempt; generic hoses designed for any use are taxable.

Eligibility

The boat will have a permanent CFV (Commercial Fishing Vessel) number on a plate attached to the boat. The fisher’s qualification for the exemption as a qualifying commercial fisher can be confirmed using the fisher’s commercial fishing licence, which is updated annually, and financial records which show that in the previous calendar year the fisher:

• Earned gross income of at least $10,000 from commercial fishing in waters in or adjacent to B.C., or
• Earned at least 51% of their total gross income from commercial fishing in waters in or adjacent to B.C.

If the taxpayer only operates under a packing, processing or exporting licence, the taxpayer is not a qualifying commercial fisher. These vessels do not qualify for exemption unless they are owned by a qualifying commercial fisher.

Boats used in non‑fishing activities

A boat obtained exempt from PST under PSTERR section 48 no longer qualifies for the exemption once it is used for something other than a commercial fishing purpose, such as fishing guiding or whale watching. Unless another exemption applies, PST applies to the boat’s purchase price depreciated in accordance with Provincial Sales Tax Regulation section 10 or 50% of the undepreciated purchase price, whichever is greater.

Boats and equipment used for sports fishing do not qualify for exemption under PSTERR section 48. A boat used by a qualifying commercial fisher to haul fish can qualify for this exemption. A boat obtained for use by a person other than a qualifying commercial fisher cannot, even if it is used by the person for a commercial fishing purpose.

Purchases and sales

It is the seller’s responsibility to ensure the exempt sale meets two criteria:

• The purchaser is a qualifying commercial fisher (as documented by FIN 455 Certificate of Exemption – Commercial Fisher), and
• The item is a boat or a fishing net or a good that reasonably can be considered fishing equipment for use by a qualifying commercial fisher for a commercial fishing purpose

An auditor who knows that a person claimed the fisher's exemption on a non-qualifying purchase or lease (for example the purchase of a boat for personal use) should treat the claim as a purchase error.

Out‑of‑province purchases of taxable items from non‑registered suppliers are assessable to the fisher.

Non‑qualifying Items

When auditing a fisher, review purchases of parts and materials. Boats, fishing nets and fishing equipment exempt under PSTERR section 48 cannot qualify as production machinery or equipment. Therefore, parts and materials used to make boats, fishing nets and fishing equipment cannot qualify for exemption under PSTERR section 108. Keep in mind that it is the seller's responsibility to ensure the goods sold to a qualifying commercial fisher can qualify and that the appropriate exemption documentation is obtained. If the goods do not qualify, raise a lead on the seller (if within the three-year limitation period) and consider assessing the fisher for the fourth year.

Software and electronic monitoring equipment

Software qualifies for exemption under PSTERR section 48 only if it is:

• Designed for use on electronic monitoring equipment designed for use in monitoring fishing activities, and
• Used by a qualifying commercial fisher solely for a commercial fishing purpose

Electronic monitoring equipment can qualify for exemption under PSTERR section 48 only if it is designed for use for monitoring fishing activities. Other monitoring equipment (such as anti-theft equipment) cannot even if it is used in relation to commercial fishing.

Accounting Records

Accounting records are often not well organized; therefore, it may be difficult to ensure all transactions are available for audit. It may be necessary to perform audit procedures using alternative records such as federal income tax returns. It is important to clearly detail and document all the records and procedures used.

Audit risk areas ‑ Motor fuel tax (MFT)

The Motor Fuel Tax Act (MFTA) permits ships, including fishing boats, to use lower‑taxed marine diesel fuel. Fuel purchased from marine fuel stations is not coloured but is taxed at $0.03 per litre. MFTA section 15 authorizes use of coloured fuel in a boat.

Audit risk areas ‑ Carbon tax (CT)

Fuel obtained by fishers is generally not exempt from carbon tax.

Relevant bulletins

Bulletin PST 102 - Commercial Fishers (PDF, 400KB) (PSTA)
Bulletin PST 108 - Boats (PDF, 332KB) (PSTA)
Bulletin MFT‑CT 003 - Coloured Fuels and Other Substances (PDF, 253KB) (MFTA and CTA)

Section 5J – Forest industry (logging, pulp mills, sawmills)

Issued: 2014/02; Revised: 2019/06/15

The following are some of the common risk areas related to this industry. This is not an exhaustive list.

Audit risk areas ‑ Provincial sales tax (PST)

General

• Request a tour of the operations
• Investigate / research taxpayer’s processes and operations in order to have a working understanding of their operations

Logging

• Boomsticks are PST exempt for all purchasers (Provincial Sales Tax Exemption and Refund Regulation (PSTERR) section 37 (1))
• Swifter wire and other bundling TPP obtained for use in transporting logs between locations and not for retail sale or lease are generally nonexempt. Swifter wire and other bundling TPP obtained for use in packaging logs for retail sale or lease can be exempt under PSTA 141. The following boom gear is exempt under PSTERR 37(2) if it was previously sold at a retail sale and previously used as boom gear: a) boom chains obtained for use in tying boomsticks together to form a frame; b) bundle and continuous wires obtained for use in securing logs that are transported within a frame; c) swifter wires obtained for use in securing bundled logs to a frame
• Machinery and equipment obtained for use 10% or more in road building does not qualify for exemption under PSTERR 104, Logging
• Personal intercom systems designed to allow safe, hands-free communication while working in confined or hazardous environments are exempt from PST under PSTERR 32(1)(i). An exempt system can include components used outside the confined or hazardous location, such as a base receiver supplied as part of the system
• Logging trucks are specifically excluded from any PME exemption (PSTERR section 114 (b))
• The exemption available under PSTERR 104 does not apply to barges and other equipment used to transport trees and logs beyond the first accumulation point
• Electricity or natural gas may be purchased from out‑of‑province suppliers who may not be registered to collect the PST. If PST has not been paid on such purchases, PST must be self‑assessed on the full landed cost, which includes transportation and all other costs described under PSTA 10(2)(f)

Pulp mills and sawmills

• Obtain a list of all chemical substances in relation to which the mill claims material exemptions under PSTERR 38 and the mill's uses of those substances
• Obtain a list of the mill's qualifying machinery and equipment and ensure none is used to a disqualifying degree in nonqualifying activities, such as repair and maintenance
• Determine what a repair part is and what the material to make parts is. Goods used to self‑manufacture qualifying PM&E for own use does not qualify for exemption under PSTERR 108 unless the goods are parts or materials obtained for use in assembling machinery or equipment that would be qualifying machinery or equipment, or parts or materials obtained for use in assembling a part that would be exempt under PSTERR 108(2)
• Equipment used more than 50% outside the qualifying part of the mill's manufacturing site cannot qualify for exemption under PSTERR 92
• Site maintenance equipment (such as graders, snow ploughs, scissor lifts) generally do not qualify for the PM&E exemption
• Consumables (such as log marking paint and ink, lumber crayons) used in the manufacture of tangible personal property (TPP) are generally nonexempt. Consumables that are attached to other TPP may be exempt under PSTA 141; other consumables can be exempt under PSTERR 38
• Non-qualifying machinery and equipment can include major assets, such as saw filing equipment and cranes, used primarily in repair and maintenance rather than in manufacture
• In order to qualify for exemption under PSTERR 112, software must be obtained by the mill for use a) primarily to operate, control or monitor qualifying machinery or equipment, or b) to operate particular machinery or equipment for use primarily to operate, control or monitor qualifying machinery or equipment, if the particular machinery or equipment is for use substantially at the qualifying part of the manufacturing site. The exemption does not apply to programs used to control or schedule maintenance
• Ensure the mill has self-assessed PST on all nonexempt related services on which the service provider charged no PST. (Related service excludes services provided to a mill's TPP by mill employees.) The auditor should determine whether unregistered persons who sell related services to the mill should be registered
• Log bundling strand that is used by a qualifying logging business more than 90% of the time to store logs at booming grounds and mill yards is exempt from PST under PSTERR 104
• PST should be self‑assessed on the company’s purchase price of lumber produced for the company’s business use (for example to build a shed for their own use). The purchase price includes the following:
  • If a company saws only logs it produces, the total amount the company paid for the right to cut such timber. This will include amounts described under PSTA 10(2)(h) such as royalty and stumpage. It does not include the mill's logging or manufacturing costs unless the mill obtains and manufactures the lumber outside B.C. then brings the lumber into B.C.
  • If a company only saws logs purchased from others, the log cost is the average price paid for the logs during the period the lumber was used
• Electricity or natural gas may be purchased from out‑of‑province suppliers who are not registered to collect the PST. If PST has not been paid on such purchases, PST must be self‑assessed on the full landed cost, which includes transportation and all other costs described under PSTA 10(2)(f).
• Pulp mills and sawmills are good candidates for CAS audits

Pulp mills

• Catalysts and direct agents used in the pulp manufacture process may be PST exempt. Note the limitations in PSTERR section 38
• Biocides, slimicides and other substances used to produce or modify a reaction that is essential for the processing or manufacture of a product for sale or lease can qualify for exemption under PSTERR 38. The reaction produced or modified can be physical or chemical
• Talc used for pitch and deposit control in the pulping process is PST exempt as a direct agent because it causes a chemical reaction
• The following do not qualify for exemption under PSTERR 38:

• Substances used to transform TPP from a gaseous, liquid or solid state to another one of those states by means of the application of pressure or a change in temperature, unless the transformation is one step in, or occurs immediately after, a series of operations or a complex operation that results in a substantial change in the form or other physical or chemical characteristics of the TPP
• Substances that are used primarily to maintain, lubricate or prolong the life of machinery and equipment (for example engine oils and grease)
• Substances that are added to waste removed from the production process
• Substances used to treat effluent (such as ammonium polyphosphate, nitrogen, oxygen gas, sodium carbonate, and sodium hydroxide)
• Substances that are added to a tailing or settling pond
• Substances that are used for testing purposes (such as the consumables, but not the equipment)

Innovative Clean Energy (ICE) fund levy (Provincial Sales Tax Act (PSTA) sections 92 and 93)

ICE fund levy of 0.4% is due on:

• Natural gas (excluding natural gas that is fuel for the purpose of the MFTA, which is exempt from PST and the ICE levy, under PSTA 140 and PSTA 95)
• Fuel oil, other than kerosene, used for the purposes of heating, cooling or raising steam, and
• Propane in a vapourized form delivered:
  • By a public utility, as defined in the Utilities Commission Act
  • By pipe, and
  • To purchasers at the place at which the propane will be used

A mill that obtains a nonexempt energy product without paying PST on it (eg, from an out-of-province supplier) must self-assess the applicable PST and ICE levy.

The maximum annual levy payable by a purchaser is $100,000 for the period April 1 in one year to March 31 in the following year (PSTA section 95 (2)). The purchaser is exempt from paying the levy once the ministry is satisfied that at least $100,000 has been paid and the purchaser has received written confirmation of exemption from the ministry.

Audit risk areas ‑ Motor fuel tax (MFT)

(MFTA sections 15 (1) (d), 15 (1) (f), 22 (1); MFTR sections 4 (1) (d), 15.2)

Trucks used by the logging industry to transport logs or lumber are authorized to use coloured fuel when used off‑highway, as are crew crummies when used off-highway for transporting the company's employees, contractors or agents carrying out an activity in the company’s logging operation, fire trucks when used as fire trucks and ambulances when used as ambulances.

Crew crummies are trucks, buses or vans with a seating capacity of six or more persons for the transportation of company employees, or contractors or agents of the company or employees of either one of them carrying out an activity in the company’s logging operation.

In certain cases, road building machines as defined by the Commercial Transport Act are permitted to use coloured fuel. Logging trucks that operate both on and off highway are required to use clear fuel and then apply for a refund for fuel consumed on the off‑highway portion.  Use of coloured fuel in a truck is not authorized if the truck is used to haul log sections, wood debris or other items that are not logs or lumber. Hog fuel and wood chips are neither logs nor lumber; therefore, coloured fuel cannot be used by the logging industry to haul hog fuel or wood chips.

Motor fuel tax paid on clear fuel used to operate the engine of a logging truck can be eligible for a clear-to-colour refund if the fuel is used while the truck is stationary and the engine is used to operate a hydraulic arm mounted on the truck.

Mills on the coast may purchase fuel by barge and sometimes from out of the province. If MFT has not been paid on the purchase of fuel, the purchaser must self‑assess MFT at the applicable tax rate using the Motor Fuel Tax Return‑Self Assessors form (FIN 135).

Audit risk areas ‑ Carbon tax (CT)

Peat, tires or imported fuel may be burned or used in the business operation to create energy. Combustibles are subject to carbon tax when they are burned. Imported fuel that is not subject to carbon tax under CTA 8, 9 or 10 is subject to carbon tax when it is used.

A mill that burns a combustible, or uses fuel not otherwise subject to carbon tax, must self-assess carbon tax on the combustible or fuel using the Carbon Tax Return-Self Assessors form (FIN 112).

Mills on the coast may purchase fuel by barge and sometimes from out of the province. If CT has not been paid on the purchase of fuel, the purchaser must self‑assess CT at the applicable tax rate using the Carbon Tax Return‑Self Assessors form (FIN 112).

Relevant bulletins and notices

Bulletin PST 110 - Production Machinery and Equipment Exemption (PDF, 432KB) (PSTA)
Bulletin PST 112 - Logging Industry (PDF, 313KB) (PSTA)
Bulletin PST 301 - Related Services (PDF, 462KB) (PSTA)
Bulletin MFT‑CT 003 - Coloured Fuels and Other Substances (PDF, 253KB) (MFTA and CTA)
Bulletin MFT‑CT 006 - Self‑Assessing Motor Fuel and Carbon Tax (PDF, 195KB) (MFTA and CTA)

Section 5K – Large retailers

Issued: 2014/02; Revised: 2019/06/15

The following are some of the common risk areas related to the large retailers industry. This is not an exhaustive list.

Audit risk areas ‑ General

• Potential for remitting B.C. sales tax to another jurisdiction
• Remitting tax based on 4‑4‑5 weeks (irregular month‑end dates), and not being registered as a special remitter
• Ineligible tax overrides for various exemptions (for example farmers, fishers, First Nations off reserve land, school supplies, children’s clothing, etc.)
• Product codes and SKUs incorrectly coded as exempt
• Marketing and legal fees paid for all jurisdictions from an out‑of‑province office with no allocation relating to B.C.
• Software accessed remotely for use in B.C.
• Out‑of‑province purchases of computer hardware, store fixtures, promotional brochures, software, etc.

Audit risk is often high due to the size and complexity of the business and its operations. A small, seemingly insignificant percentage of errors can result in material tax understatements. Large retailers typically sell a range of products and services across many different lines of business with the financial information provided in large electronic files.

Auditors should develop their knowledge of the business by performing extensive research into inventory product coding and customer types (wholesale vs. retail) to obtain adequate knowledge and background of sale and purchase transactions. Two sets of sales application tests may be required. Tax application may be verified by examining the retailer’s product master tax coding database. Product tax coding may be overridden at the point‑of‑sale terminal. Therefore, a second test of transaction samples from the point‑of‑sale is often required to verify that controls are not erroneously overridden. The retailer may make online sales through its website. A web-based seller may utilize a separate system for online sales; such a system should be included in any test of a seller's point-of-sales systems. Upon reviewing online/internet sales transactions, it is imperative to determine where title passes as well as the shipping locations in order to determine whether shipping charges must be included in the relevant purchase price.

In most cases, purchases are made through the head office (or one central source), which is typically located out‑of‑province. These taxpayers must self‑assess tax on intercompany purchases that are for their own use. You may need to contact advertising and marketing staff directly to obtain knowledge of these programs. You may also need to contact information technology staff to determine what procedures are used for acquiring computers, point‑of‑sale equipment, and associated software. Software is often pre-loaded on computers at the retailer’s head office. Thus, self‑assessments can be missed on such purchases.

In almost all circumstances, auditors should involve the CAS team and statistical sampling in the audit of a large retailer because of the volume of electronic records. See Chapter 6  - Computer Assisted Audit Techniques (CAAT) of this manual for details.

References

Bulletin PST 302 - Delivery Charges (PDF, 400KB) (PSTA)

Section 5L – Legal services industry

Issued: 2014/02; Revised: 2019/06/15

The following are some of the common risk areas related to this industry. This is not an exhaustive list.

Audit risk areas

Legal services provided outside B.C. to a B.C. resident (Provincial Sales Tax Act (PSTA) section 127)

Unless an exemption applies, a B.C. resident who purchases a legal service provided outside B.C. must pay PST on the service if the service is described under PSTA section 127(2). If the legal services relate to B.C. and to a jurisdiction other than B.C., PST applies to the portion relating to B.C.

It is common for a business to debit payments for ongoing legal services to a prepaid account while the legal work is being done, then to an expense account once the work is completed. The prepaid amounts are not subject to PST until they are used by the law firm as consideration for the services. The auditor should inspect prepaid accounts for amounts that have become subject to PST.

The auditor should discuss whether the legal fees pertain to B.C. with someone who is knowledgeable about the legal fees incurred. Legal invoices relating to some sensitive information may be segregated and maintained by a senior level employee. The details may not be disclosed but enough information should be provided to determine if the fee is taxable or not.

Legal services provided under contract (Provincial Sales Tax Exemption and Refund Regulation (PSTERR) section 80)

The following applies to persons who provide legal services under a contract. It applies to anyone to the extent they provide services captured by the PSTA definition of legal services.

Legal services provided under contract

The PSTA does not provide a resale exemption for legal services. However, under certain circumstances, legal services are exempt from PST if they are provided to a lawyer, legal firm, notary or notary firm, and by a person (other than an employee of the lawyer, notary or firm) who provides legal services only to the lawyer, notary or firm. To satisfy PSTERR section 80(a), the person must not provide legal services to any persons except the lawyer, notary or firm referred to in that section (for example the person must not have other clients).

PSTERR section 80(c) requires that the purchase price to the lawyer, notary or firm for the legal services be included in the purchase price of legal services billed or otherwise charged to the client by the lawyer, notary or firm. The lawyer, notary or firm should rebill for the exempted purchase price as a separate charge on the client's invoice or, if the client is charged a single price, as a separately described item.

The lawyer, notary or firm is required to collect PST on the total purchase price of the legal services, including the portion attributable to the firm’s rebilling of the exempt legal services.

No exemption applies if any of the conditions in paragraphs (a), (b), or (c) of PSTERR section 80 are not met.

Non‑exclusive third‑party contract legal services

Some providers of legal services purchase legal services that do not qualify for exemption under PSTERR section 80. A purchaser of such a legal service must pay PST on the service. The purchaser can recover the cost of the service by billing it to the client as a non‑taxable disbursement.

Note: If a billing item is characterized as a disbursement, but it is not a recovery of an out‑of‑pocket expense that the Primary Provider incurred on behalf of a client as a result of a billing by a third party, such an amount is generally part of the purchase price of legal services and subject to PST (such as paralegal time, word processing, and computer costs).

Corporate structure

Law firms are often structured as partnerships. Changes in ownership of partnership assets can trigger a tax liability.

Some legal firms set up separate companies or partnerships to manage the administration and to hold title of capital assets. Determine whether such management companies or partnerships should be audited in conjunction with the legal firms.

Access to records

If a law firm denies access to its records, request to review its client billings with the client names deleted (to avoid the firm revealing confidential client information to the branch).

If the firm still denies access to its records, deliver a written request making reference to PSTA section 194, Inspection and audit powers, and section 230, Offences and penalties, and ask for a written response from the taxpayer so the issue can be referred to the audit manager.

If the refusal relates only to records of specific, named clients, the auditor should request the law firm follow procedures set out in the Provincial Sales Tax Regulation (PSTR) sections 98‑101. Complete a partial audit if possible, and bring the unresolved items to the attention of the team leader or audit manager.

Relevant bulletin

Bulletin PST 106 - Legal Services (PDF, 407KB) (PSTA)

Section 5M – Liquor sellers

Issued: 2014/02; Revised: 2021/11/26

Overview

Liquor sellers include restaurants, bars, pubs, night clubs, lounges, retail liquor stores (including licensed grocery stores), and any other establishment that sells alcoholic beverages.

The purpose of a liquor audit is to determine if all sales of liquor were reported and if all applicable taxes were properly applied, calculated, accumulated, and remitted.

Workload Development (WLD) creates leads for liquor audits using a calculation similar to the Liquor Variance Reports.

The estimated amount of tax is calculated using the taxpayers’ actual liquor markups (if available from a prior audit) or standard industry markups for the liquor license type. If available, the taxpayer’s markup from a prior audit is included on the Liquor Variance Report; otherwise, the standard industry markup is included. The standard industry markups are averages of markups determined during audits conducted under the Provincial Sales Tax Act. If there are no other risk factors, liquor lead cases created by WLD due to tax variances from liquor sales only are placed in the ‘Liquor Queue’ and reviewed by the liquor team.

Audit lead cases generated for reasons other than the tax variance on liquor sales are placed in the general queue. Because liquor may be only one component of the taxpayer’s business (such as a hotel or golf club), there may be other areas of risk of non-compliance which warrants review. During audits of such businesses, the liquor operations must be reviewed in order to determine if a full liquor audit is also necessary.

Conducting a liquor audit

Liquor licence types

The main types of liquor licences are:

Food primary licence (FP)

FP licences are issued to businesses such as restaurants where the service of food (rather than liquor) is the primary focus of the business. Licensed FPs may serve any kind of liquor; however, a full menu of food items must be available to be served whenever liquor is available.

Liquor primary license (LP)

LP licences are issued to businesses in the hospitality, entertainment or beverage industry such as bars, pubs, lounges, nightclubs, stadiums, theatres, recreation, and convention centres. They may also be issued to art galleries, spas and other types of businesses whose main focus may not be the sale of liquor.

LP licences may also allow off sales on a limited basis. (Off sales are sales of liquor that cannot be consumed on the premises.) The license would indicate if off sales are permitted.

Licensee retail store and wine store license (LRS/WS)

LRS and WS licences are issued to private liquor stores (not operated by the government). LRS and WS may also sell packaged snacks, non‑alcoholic beverages, B.C. Lottery products, and liquor‑related items such as glasses, bottle openers, and corkscrews. Liquor purchased from an LRS and WS may not be consumed on the premises.

Wine stores (WS)

WS can be standalone or located inside large grocery stores. These stores can sell wine only and some are restricted to B.C. wine only.

Rural agency store (RAS)

RAS is an agency issued by the Liquor Distribution Branch (LDB) to private retail stores including full service grocery stores that are located at least 10 kilometers driving distance from the nearest B.C. Liquor store (BCLS), LRS, WS or another RAS. RAS operators may sell liquor to:

• Retail customers
• Establishments licensed under the Liquor Control and Licensing Act to sell liquor, such as licensed restaurants and pubs; and
• Special event permit holders upon presentation of the permit

RAS operators can sell non‑liquor products provided liquor products are displayed in specific areas of the store.

Manufacturer on-site store (MOS) endorsement

MOS endorsements are issued to manufacturers (such as brewery, winery, and distillery) that produce and sell their own liquor products and limited quantities of other non-liquor products at the manufacturing facility. Most MOS may sell liquor to the public and to other liquor license holders.

Agent’s license

Independent liquor agents and importers that promote, market, or accept wholesale orders for liquor products are required to obtain an agent's license.

UBrew / UVin license (ferment-on‑premises)

UBrews and UVins are businesses that provide their customers with the ingredients, equipment, and advice to make their own beer, wine, cider or coolers. Once the product has been made, customers must take their liquor away for consumption. The liquor cannot be sold to others.

All liquor licences are issued by the Liquor and Cannabis Regulation Branch (LCRB). For information about the LCRB, see our Liquor and cannabis regulation page.

Liquor license information in TACS

Liquor licence information for taxpayers is available in TACS:

• On the PST Account springboard for a taxpayer, select the “Registration” tab
• On the Account sub‑tab, located on the bottom‑left corner of the screen, there is a checkmark within the “Liquor Licences” checkbox
• Click on the “Liquor Licences” hyperlink to view the list of all the liquor licenses associated with the particular PST account along with the respective details on the status, type, commencement date, cease date, ownership, etc.
• The liquor licence number can also be entered in the Search manager and the corresponding details will be listed

TACS displays all active and dormant liquor licences for the taxpayer. Review the status and details of each liquor licence.

Under LCRB rules, a liquor license owner may lease the liquor license by filing a ‘Third Party Operator Application’ (LCRB026) with the LCRB. Where there is an agreement in place, review the license information to verify that the third party operator is responsible for collecting and remitting the tax and is registered. The owner of the liquor license cannot be held liable for the tax liability unless the agreement specifically states that the license owner remains liable for unpaid PST collected by the lessee.

During the audit, obtain copies of the application and the ‘Third Party Operator Agreement’ between the parties if they have entered into such an agreement. Attach both the application and agreement to the audit in TACS.

Create a work item for the registration section if the information in TACS is not correct and requires updating.

The liquor variance report in TACS

The Liquor Distribution Branch (LDB) is responsible for the distribution of liquor in B.C. and operates the government liquor stores. Liquor retailers purchase liquor either directly from the LDB, liquor manufacturers or from RAS. Manufacturers and RAS must report, to the LDB, the amount and the volume of their sales to licensed vendors, using a custom online application called Direct Sales Website Reporting (DSWR). This allows the LDB to maintain a record of all the liquor purchased by retailers under each liquor license number. For more information about the LDB, see British Columbia Liquor Distribution Branch.

Under an agreement for the exchange of information between LDB and the Ministry of Finance, LDB provides liquor purchase information by license number to the Ministry. This information is loaded into TACS on a monthly basis. The purchase information along with the Liquor Variance Report can be generated in TACS. The Liquor Variance Report shows the variance between the estimated tax that should have been collected and remitted and the actual tax that was remitted by month for the period specified. The Liquor Variance Report uses, by default, the mark‑up for various categories of liquor, based either on the previous audit (if available) or standard industry mark‑ups (if there is no audit history), to calculate the following: estimated sales based on the licensee’s purchase price of each type of liquor multiplied by the corresponding mark‑up, estimated tax payable, and the variance between estimated tax payable and the actual tax remitted per the licensee’s tax returns. The report also shows the mark‑up factors applied to calculate the estimated sales.

The standard industry mark‑ups used in the Liquor Variance Report are:

Description	Draft	Beer	Wine	Cider	Spirits	Special
Food primary	3.5	3	2.5	3	5	3
Liquor primary	3.5	3	2.5	3	5	3
Licensee retail stores and wine stores	1.4	1.4	1.4	1.4	1.4	1.4
Rural agency stores	1.2	1.2	1.2	1.2	1.2	1.2

Note: The purchase amounts on the variance report for LRS, WS and RAS for the period prior to April, 2015 do not reflect the discounted prices paid by LRS, WS and RAS. The purchase amounts for these types of liquor licenses must be adjusted to determine the true variance. Details are noted below.

To generate the Liquor Variance Report in TACS:

• Go to New Manager and select “Report”
• Select the “Report List” tab
• Type the word “Liquor” in the green filter box and hit enter
• Under Title, select the “Liquor Variance Cube”
• In the Account Number field enter the taxpayer’s PST number in the format: “PST-xxxx-xxxx”
• In the Liquor Licence field enter the taxpayer’s 6‑digit license number, including leading zeroes. Enter additional liquor license numbers in subsequent cells if applicable or run the report separately for each licence type
• Fill in the corresponding “Date From” and “Date To” fields. These should match the sales audit period
• Click on the “Generate” button on the top right‑hand corner of the screen to generate the report
• Export to Excel by clicking on the grey “Menu” or export icon button on the top right‑hand side, then select Excel under the Export heading
• To drill‑down and see a detailed listing of invoice numbers, purchase amounts, store purchase locations, license(s) and mark-up factors used in determining estimated PST amounts for each month, select the total purchase amount found at the bottom of the “Purchases” column. This more detailed liquor variance report can also be exported by clicking on the blue export icon found at the top right-hand corner of the report

The Liquor Variance Report shows the value of liquor purchased by invoice and by category (draft, beer, wine, cider, spirits and special). The liquor identified as 'special' is liquor that is not part of LDB’s regular inventory but brought in upon request. The Variance Report does not provide details of types or brands of liquor purchased under each category. For example, the report shows the total amount of beer purchased on a particular invoice but it does not provide how much Coors Light, Budweiser, Molson Canadian or any other type of beer was purchased.

The purchase prices on the report are LDB’s display prices before taxes (10% PST and 5% GST) and the litter deposit.

Prior to April 2015, LRS/WS and RAS received additional discounts from the LDB. The report shows the pre-discounted prices for these licence types. LRS/WS received an additional 16% discount off LDB’s wholesale price between April 28, 2013 and March 31, 2015 and RAS licensees received an additional 12% discount from the LDB's wholesale price. The Liquor Variance cube generated for LRS/WS and RAS must be manually adjusted for the discounts.

Preliminary variance analysis

Perform preliminary variance analysis if liquor is a component of the audit and WLD has not done the preliminary Liquor Variance Analysis or the auditor wants to do analysis for a longer period than the analysis done by WLD.

Generate the Liquor Variance Report in TACS to perform the preliminary variance analysis. The report applies the 10% PST to the total dollar value of estimated liquor sales and calculates the 'Total Estimated Tax' amount.

Review the mark‑ups and confirm that the correct standard industry mark‑ups or the mark-ups calculated from a previous audit are applied based on the type of liquor licence.

Compare the 'Total Estimated Tax' figure to the 'Tax Collectable' amount.

The difference calculated between the estimated PST collected and the amounts remitted is expressed both as a percentage and a dollar amount. A large variance in percentage and dollar amount indicates potentially a large difference between PST collected and the PST reported.

Discuss the variances noted and other risk factors with the audit team leader or manager to determine if a full liquor audit is necessary. If it is determined that a full liquor audit is necessary, some or all of the following must be included in the audit plan.

If a full audit is necessary, proceed to the next steps.

Records

For the liquor portion of the audit, at a minimum, request the following records from the taxpayer in the Audit Engagement letter:

• General ledger tax account for the entire audit period
• Till tapes (cash register tapes) for the sample month OR sales reports from point of sales (POS) system for the sample month showing quantities and the sales amount for each type of drink
• Copy of the drink menu
• Police report(s) or insurance claim(s) for any stolen liquor inventory
• Liquor purchase invoices for the sample month. (Match invoices to the purchase information in the Liquor Variance cube from TACS for the sample month to ensure completeness)
• Records for promotional drinks, excess spillage, (including excess spillage due to breakage and due to the nature of the business such as night club) and liquor used in cooking
• Liquor inventory records at the beginning and at the end of the sales audit period
• Financial statements
• Purchase information from general ledger for the entire audit period. (Reconcile the purchases on the Liquor Variance Report for the audit period to ensure completeness)
• Sales general ledger for the sample period. (Reconcile the general ledger with sales per POS system or with till tapes for the sample period and the sales reported on the tax returns)

Audit interview

Conduct an interview with the taxpayer and or representative to gain an understanding of the operations. The following may be completed during the initial interview:

• Explanation of the liquor audit methodology
• Agreement on sample month(s) selected
• Verification/confirmation of liquor licence(s) and the effective date(s)
• Review of information on accounting/POS system used
• Evaluation of internal controls
• Review details of promotional drinks
• Review of information on spillage
• Review of information on liquor used in cooking
•  Review of other liquor related information
• Test pours
• Tour of the premises

Liquor audit methodology

Review the following aspects of the liquor audit methodology with the taxpayer at the initial meeting:

• The weighted average mark‑up for each category of liquor (draft, beer, wine, coolers, and spirits) for a sample period (usually one month) is used, taking into account various factors, such as spillage, promotional drinks, liquor used in cooking and the difference in inventory level at the beginning of the sales audit period and at the end of the sales audit period
• The calculated actual mark‑up is applied to liquor purchased in each of the months in the sales audit period to determine estimated liquor sales
• The tax payable is calculated by applying the appropriate tax rate to calculated liquor sales
• The actual variance is the difference between the tax remitted and the amount of tax estimated to have been collected
• Unexplained variance for the entire audit period is considered unreported sales and assessed as a sales application error, as liquor is purchased specifically for resale

Selection of a sample period

Obtain agreement with the taxpayer on a mutually selected sample month for the calculation of mark‑ups. It is important that the sample month selected is representative of the audit period. Avoid selecting a month with very high sales or very low sales. Avoid months in which unusual events may have occurred, such as when a new bartender or new staff were hired.

Liquor licence verification

Obtain copies of the liquor licences from the taxpayer:

• Verify liquor licence numbers and the licence types against the information in TACS
• Determine if the liquor licence allows off sales. Off sales are at a lower price than regular pub liquor and must be analyzed separately from pub liquor sales
• Verify the liquor licence holder’s name in TACS against the name on the liquor licence
• Determine if the liquor licence holder is the owner or lessee of the liquor licence. If the licence holder is a lessee, obtain the Third Party Operator Agreement
• If there are any discrepancies between the information on the liquor licence and the information in TACS, generate a work item to correct the information in TACS
• Verify that the taxpayer is the owner/lessee of the licence for the entire audit period

Accounting and POS system

• Determine whether the taxpayer has a manual or computerised accounting system
• Determine whether the taxpayer has till tapes or sales reports from the POS system
• Determine the number of cash registers
• Determine if the reports and till tapes provide a breakdown of the drinks sold by type within each liquor category
  • For example, within the liquor category 'beer', do the reports and till tapes provide details of sales for each type (Coors Light, Molson, Budweiser, Corona, etc.) of beer sold? This is required for accurate calculation of the weighted average mark‑up for each category of liquor
• Determine if the reports and till tapes provide both the amount charged and number of servings for each type of liquor

Internal control evaluation

Review internal controls to determine risk and possible reasons for significant liquor variance. Enquire into:

• Whether regular inventory counts are done and differences between the book value and actual count are identified, investigated, and resolved
• Who orders liquor
• Who receives liquor
• Who rings up the sale in cash register
• Who handles cash
• Who opens the store at the beginning of the day
• Who closes the store at the end of the day
• Whether bartenders dispense liquor by free pours, jiggers or metered dispensers / guns
  • Note: There is better control if metered dispensers are used provided they are properly maintained
• Whether there has been any recorded theft during the audit period. Adjustment for theft must only be made if it can be substantiated by a police report or insurance claim

Promotional drinks 

Explain the difference between promotional drinks and discounted drinks.          

Note: Promotional drinks are free giveaways, whereas discounted drinks are drinks offered at a discounted price for reasons other than promotional distribution. Promotional drinks are considered withdrawal from resale inventory for own use and therefore taxable at cost. Discounted drinks are accounted for in the calculation of actual mark-up.

 Enquire into:

• Whether promotional drinks are offered
• How promotional drinks are recorded
• Whether tax is remitted on promotional drinks. (If tax on promotional drinks was self-assessed based on selling prices, vendor may be entitled to a refund)
• Who authorizes the promotional drinks offered to the customers and how are they recorded
• Whether free drinks are offered to staff
  • If yes, determine how staff drinks are controlled and how are they recorded
  • Tax on free drinks to staff must be based on cost; unpaid tax amounts can be prorated over the entire audit period if the taxpayer has not self-assessed the tax
  • Drinks given to staff at a discount would be incorporated into mark-up calculations like discounts offered for specials or happy hour

Spillage

Spillage factors are used in the mark-up calculations. Obtain the following to determine the spillage factors for each category of liquor:

• Number of days in a month the pub or restaurant is open
• Number of draft lines
• Length of draft lines (approximate)
• Number of lines per keg size
• Average number of kegs purchased on monthly basis
• Frequency of line cleaning
• Type of cooling used. (Glycol cooled lines need to be cleaned less often than regular lines.  Two separate calculations for draft spillage may be required if the glycol cooled lines were installed in the middle of the audit period)

Liquor used in cooking

Liquor used in cooking is exempt.

Enquire into:

• Whether the business uses liquor in cooking
• How liquor used in cooking is recorded

Other liquor related information

Enquire into:

• Whether the business offers drinks made from two or more categories of liquor 
  • For example sangria which consists of wine and spirit. See section 7(VIII), 'Other Factors to be Considered when completing the Spreadsheets' below regarding mixed drinks
• Whether the menu offers food and liquor combo for one price
  • In this case, liquor should be priced at fair market value and recorded accordingly
• How replacement drinks, void sales, etc. are recoded
• Whether the business hosts special events, such as Christmas parties, etc. If so, adjustments may be required to allow for special liquor pricing at such events
• Whether there were significant differences in the liquor inventory between the beginning of the audit period and the inventory at the end of the sales audit period, an adjustment may be required
• If the business uses imperial ounces (28.4131ml) or US ounces (29.5734ml). Use the appropriate conversion factors when converting serving sizes from ml to oz

Test pours

• Conduct test pours for liquor served by glass (draft, wine, and spirits) in order to obtain the volume of liquor sold per serving
• Request the bartender use water to demonstrate the serving sizes
  • A principal of the company or designated representative must be present during the test. The results must be documented and signed off by both the auditor and the company principal or designated representative

Tour of the premises

Complete a tour of the premises. Observe operations and evaluate internal controls.

Determine:

• How access to the bar area is controlled (lock, buzzer)
• How access to the storage area is controlled (lock, buzzer)
• Whether there are anomalies in inventory levels (unusually high or low)

A comprehensive checklist of the above items is available on the M-drive at: M: CTAB\Template-R-Read-Only\Audit\Liquor.

Mark‑up calculation and tax owing excel template

Once the initial interview with the taxpayer has been completed and all records are available, calculate the mark-up using the workbook labelled 'Audit Working Papers Templates – Combined and Linked'.

Start by saving a copy of the template to the H drive. Instructions on completing the workbook are in a separate worksheet in the workbook. Because the spreadsheets are linked by formulas, it is advisable to complete the worksheets in the following order:

1. Test size worksheet
2. Purchase worksheet
3. Sales Detail worksheet
4. Sales Summary worksheet

Spillage worksheets

There are separate spillage worksheets for draft, wine, and spirits.

Allow minimum spillage (noted below) even if the calculated spillage factor is less than the minimum.

Draft – 5%
Wine – 2%
Spirits – 2%

No spillage is allowed for liquor served by bottle.

The spillage percentages were set in consultation with ABLE B.C.

Promo and food worksheet

Liquor used in cooking and given away for promotional purposes is noted on the Promo and Food worksheet at the marked-up price (what would have been the selling price had the liquor been sold). The calculations are carried forward to the Estimated Tax worksheet and tax payable by the vendor.

Note: The tax due on promotional liquor and liquor given away to staff or consumed by management is calculated separately at cost and assessed as a purchase error over the entire audit period.

Estimated tax worksheet

Copy the tax remitted from the Liquor Variance cube into column 'PST Data Report' in the Estimated Tax worksheet. The tax remitted per the Liquor Variance cube should equal the amounts shown as remitted per ad hoc report.

Other factors to be considered when completing the spreadsheets

• In the sales detail and sales summary worksheet, review liquor categories (draft, bottled beer, wine, cider or cooler, spirit and other) to determine if further subgrouping within each liquor category is necessary to separate cheaper liquor from more expensive liquor (for example within 'draft' category, separate local draft from imported draft because imported draft is more expensive than the local draft) to ensure a more representative mark‑up for each liquor category
• Adjust for mixed drinks consisting of two or more different types of liquor (for example sangria contains both wine and spirit). Sales of mixed drinks must be allocated to each liquor category based on the cost of the liquor
• Ensure the adjustment is made for liquor used in food preparation, given away as promotional drinks and consumed either by staff or management
• Adjust for significant changes in the level of liquor inventory during the audit period on the estimated tax spreadsheet
• Adjust for bundled sales of food or other items with liquor. The adjustment must be based on the fair market value (as bundled sale rules apply). Include the item on the template in the calculation of mark‑up on a separate line within the grouping

Note: The worksheets in the template are linked by formulae. The formulae are not protected. Caution must be exercised not to override the formulae in the master spreadsheet.                       

Proposed assessment

• Discuss the variance calculated based on actual markup with the team leader to determine next steps. In light of the fact that the methodology involves some estimation, an assessment may not be justified if the variance is immaterial. Discuss with the team leader to determine if an assessment is warranted
• However, there may still be an assessment for promotional drinks and drinks consumed by staff and management
• The assessments resulting from the variance analysis are sales application errors and are limited to a three-year period. Additional penalties should not be assessed if it is a first audit but may be imposed on subsequent audits under section 205 (c) of the Provincial Sales Tax Act (PSTA)
• As a part of the audit, a review of the general ledger tax account must be undertaken. If a tax account error is identified (tax was collected but not remitted) and is being assessed, it may be necessary to adjust the tax remitted (increase the tax remitted by the amount of tax account error assessed) on the estimated tax spreadsheet when calculating the liquor variance and hence sales application error

Every effort should be made to base the assessment on actual mark‑up. If the assessment must be based on standard industry mark‑up, then the adjustment should be made for spillage based on minimum spillage allowance.

Note: Select 'Liquor' from the 'Program' drop‑down box in order for TACS to generate the appropriate liquor report tab in the working papers.

Mark-up reporting

Revised mark‑up percentages for each liquor licence must be recorded in the audit report. Ensure that the liquor licence is six digits and entered with any applicable leading zeros. There are four columns provided to report markups. Each column represents one license. WLD will update the mark-ups in TACS.

Other

Special event permit (PSTA section 98)

A Special Event Permit is required when liquor is served at a location other than a residence or a licensed establishment. Special Event Permit holders pre-pay the tax at the purchase price if the liquor is not going to be sold or at an estimated selling price if the liquor is going to be sold. Refer to Special event liquor permits and to section 98 of PSTA for details.

Liquor sold by auction

For fundraising purposes, charitable organizations may auction liquor without a liquor licence or Special Event Permit (see LCRB website for more information). PST must be charged and collected on the total purchase price that the successful bidder pays for the liquor.

Relevent bulletins

Bulletin PST 119 - Restaurants and Liquor Sellers (PDF, 387KB) (PSTA)
Bulletin PST 304 - Thrift Stores, Service Clubs, Charitable Organizations and Societies (PDF, 395KB) (PSTA)
Bulletin PST 400 - PST Refunds (PDF, 504KB) (PSTA)

Section 5N – Manufacturing

Issued: 2014/02; Revised: 2019/06/15

Manufacture means to fabricate or manufacture tangible personal property (TPP) to create a new product that is substantially different from the material or TPP from which the new product was made or to process TPP by performing a series of operations or complex operation that results in a substantial change in the form or other physical or chemical characteristics of the TPP. Manufacture does not include performing a non-qualifying activity.

Before conducting an audit on a manufacturer, auditors should visit and tour the premises. A tour with the plant manager or engineer will provide background information on how the process operates, where the site begins and ends, and the type of machinery used in the manufacturing process. The observations made in a site tour are invaluable when completing the knowledge-of-the-business section of the audit file and when auditing purchases and determining eligibility for various exemptions.

The following are some of the common risk areas related to this industry. This is not an exhaustive list of the risks.

Audit risk areas – Provincial sales tax (PST)

Production machinery and equipment (PM&E) exemption

Purpose – to provide an exemption for qualifying machinery and equipment, parts and materials and services obtained by qualifying persons.

General qualifications:

• Threshold of $30,000 in sales revenue or production costs (includes own use)
• PM&E must be used primarily (over 50%) and directly in a qualifying activity
• PM&E must be used primarily (over 50%) at the qualifying part of the manufacturing site *
• See Bulletin PST 110, Production Machinery and Equipment Exemption, for detailed explanations of directly, primarily, and substantially
• Provincial Sales Tax Exemption and Refund Regulation (PSTERR) section 90 provides definitions for manufacture, manufacturer, non‑qualifying activities, and other relevant PM&E terms
• PSTERR section 92 exempts machinery and equipment obtained for qualifying manufacture use by a manufacturer

* Qualifying Part of the Manufacturing site – The part of the manufacturing site from the point at which the raw material is received to the point at which the finished product is first stored or first placed on a vehicle, railway rolling stock, vessel, aircraft or other conveyance for removal from the manufacturing site, whichever occurs first.

Purchases

The exemption available under PSTERR section 108 can apply to parts obtained for use on qualifying machinery and equipment; materials obtained to repair, maintain or modify qualifying machinery or equipment; parts and materials obtained for use in assembling qualifying machinery and equipment; and parts and materials obtained by a qualifying person to assemble a part that would be exempt under PSTERR section 108. Bulletin PST 110 provides examples of qualifying parts, materials and services, as well as examples of taxable items.

Consumables, gases, liquids, and other items noted in Bulletin PST 110 and PSTERR section 110 are non-exempt, as are goods obtained for use in making non-qualifying machinery and equipment, and goods obtained for non-qualifying use on or with qualifying machinery and equipment. Note that in order for material to be exempt under PSTERR section 108(2) it must be used to 'assemble' qualifying machinery and equipment. 'Assembly' is not a general synonym of manufacture; use of the material for something other than assembly disqualifies the material from exemption. The taxpayer should pay PST on these items.

To claim the exemption the taxpayer must provide a Certificate of Exemption – Production Machinery and Equipment form (FIN 492). Often, a taxpayer will purchase all items from the same supplier. If the taxpayer purchases the items in more than one sale, the taxpayer can use a single FIN 492 to claim exemption on all the items as long as information on the form applies to all the items.

See PST exemptions and documentation requirements for a list of exemptions for PM&E.

Specific exemptions

See PSTERR for specific exemptions:

• Pollution Control, section 99
• Waste Management, section 100
• Transmission or Distribution of TPP or Software, section 101
• Electrical Machinery or Equipment, section 102

Service Providers – PSTERR section 103

Businesses that use machinery and equipment to provide manufacturing services to manufacturers are eligible for the PM&E exemption if the conditions specified in PSTERR section 103 and described in Bulletin PST 110 are met.

Relevant bulletins

Bulletin PST 110 - Production Machinery and Equipment Exemption (PDF, 432KB) (PSTA)
PST exemptions and documentation requirements (previously published as Bulletin PST 200)

Section 5O – Mining industry

Issued: 2014/02; Revised: 2019/06/15

Overview

Mining activities include exploration for minerals, development of mines, and extraction and processing of minerals (see Provincial Sales Tax Exemption and Refund Regulation (PSTERR) section 1 for definition of mineral). Businesses engaged in qualifying mining activities are eligible for the production machinery and equipment (PM&E) exemption (PSTERR section 96 and 97).

Mines can be above ground (open pit) or underground. Some have full or partial processing of the extracted minerals on site (such as coal plants, gold) while others simply extract the raw product and ship it to another location for processing.

The following are some of the common risk areas related to this industry. This is not an exhaustive list.

Audit risk areas ‑ Provincial sales tax (PST)

Tax account

Mining companies generally make many purchases from out‑of‑province suppliers. The audit review should ensure that self‑assessments of PST have been recorded, accumulated, and remitted in accordance with the legislation.

Purchases

• Ensure that PST has been calculated on the total purchase price paid by the purchaser to receive title to taxable goods. Refer to Bulletin PST 302, Delivery Charges, for guidance. See also PSTA 10
• Parts used on qualifying PM&E or materials used to repair, maintain or modify qualifying PM&E are exempt from PST (PSTERR section 108). Parts inventory may include items that are used for both exempt and non-exempt purposes. Ensure that It is reasonable for a bulk purchaser of TPP to estimate the non-exempt portion of the TPP and, every reporting period, determine the actual non-exempt portion and report and remit any PST owing. Verify that PST was self‑assessed on items that were purchased exempt but used for non-exempt purposes if the reconciliation shows more non-exempt usage than originally estimated
• In relation to mining, the only TPP exempt from PST as safety equipment and apparel is TPP described in sections 32, 33, and 35 of the PSTERR. It is not uncommon for the mining industry to mistakenly consider other items as exempt safety equipment. For example, fences used to block off a site, safety warning signs, wheel chocks used to prevent movement of a vehicle while it is parked, etc., promote safety at the mine site; however, these items do not qualify as safety equipment under the PSTERR and are generally non-exempt
• Section 36 of the PSTERR exempts explosive supplies if used for qualifying mining activities. This does not include explosive supplies used for other purposes, such as construction of an access road
• Chemical substances, catalysts and direct agents, as defined in section 38 (1) of the PSTERR, are used regularly in the processing of minerals. PSTERR section 38 (2) describes the conditions under which chemical substances, catalysts, and direct agents are exempt from PST. It is also important to note that PSTERR section 38 (3) provides the conditions under which the exemption does not apply
• Mining operations consume large amounts of energy, such as electricity, natural gas and petroleum fuels. Determine whether there are any purchases from out‑of‑province suppliers, who may not be registered to collect the appropriate tax. If tax has not been paid on such purchases, tax must be self‑assessed on the full landed cost, which includes transportation and other amounts described under PSTA 10(2)(f)
• Natural gas billings can be complex. Often, there will be more than one party involved in the gas supply to the mine, each separately billing its respective component of the supply. There may be a variety of charges that require careful consideration in determining the taxable purchase price. It is important to determine the location where title to the natural gas transfers to the purchaser, as the inclusion of certain amounts in the purchase price depends on whether the gas is obtained in or outside the province
• Section 92 and 93 of the Provincial Sales Tax Act (PSTA) imposes the Innovative Clean Energy (ICE) Fund levy of 0.4% on the purchase of energy products. If the seller does not collect the levy due, the purchaser must remit the levy to the ministry. The levy must be calculated on the purchaser's total purchase price of the energy products. The maximum annual levy payable by a purchaser is $100,000 for the period April 1 in one year to March 31 in the following year (PSTA section 95 (2)). The purchaser is exempt from paying the levy once the ministry is satisfied that the purchaser has paid at least $100,000 of the levy in the period and has received written confirmation of exemption from the ministry
• Section 127 of the PSTA imposes PST on legal services provided outside B.C. to a B.C. resident if the legal services relate to B.C. for example, if they relate to anything described under section 127(2). Mines located in B.C. can have out‑of‑province interests in the mine. At times, these out‑of‑province entities may use legal firms located outside B.C. for legal services that relate to a mine in B.C. These legal fees may be billed to the mine or to another related company and may be taxable under the PSTA

Capital assets

• PM&E for exploration and development is not site specific but must be used substantially (over 90%) and directly in the exploration or development of mines. On the other hand, PM&E relating to the extraction and processing of minerals must be used primarily (more than 50%) and directly in the extraction and processing of qualifying minerals and primarily within the qualifying part of the mine site. See PSTERR section 90 for definition of 'Qualifying minerals'
• Geophysical surveying equipment qualifies for the PM&E exemption only if it is specifically listed in section 98 (2) of the PSTERR
• Pollution control and waste management machinery and equipment qualify for the PM&E exemption if they meet the specific conditions of PSTERR sections 99 and 100
• Except for bulldozers, backhoes, excavators used for the exploration of minerals or the development of mines, and trucks that transport qualifying truck-mounted service rigs, vehicles that are designed to be ordinarily used on a public highway are not eligible for the PM&E exemption (PSTERR section 114 (b))
• Machinery or equipment used for the construction of buildings, site preparation, or the construction or maintenance of roads is excluded from the PM&E exemptions (PSTERR section 91(2)). The only exception is machinery or equipment obtained for use in site preparation for the purposes of section 94 and 104 (PSTERR section 91 (3)) and in the construction or maintenance of roads within the qualifying part of the mine site for the purposes of section 96 and 97 (PSTERR section 91 (4))
• Electrical machinery or equipment as defined in section 102 (1) of the PSTERR qualifies for PM&E exemption if the conditions detailed in section 102 (4) of the PSTERR are met. Since this exemption specifically relates to mineral extraction and processing operations, the qualifying electrical machinery or equipment must be situated at the mine site. If a mine site is within reach of a power grid, power distribution equipment (such as power lines, power poles, transformers, switchgear, and motor control units) may be required to gain access to the power grid. The PM&E exemption does not apply to power distribution equipment situated outside of the mine site. The audit must include a detailed review of all power distribution equipment
• If a mine operator pays temporary-use PST on equipment, ensure that PST has been self‑assessed on the appropriate taxable value under the 1/3 formula for each calculation year in which the equipment was in B.C. (PSTA section 51). A person who makes temporary use, in petroleum or natural gas exploration or development, of a cement truck, a fracturing truck, or a vehicle on which seismic recording equipment or well logging equipment is permanently mounted, can pay temporary-use PST on such equipment using a 1/36 formula, in accordance with PSTR section 16. The purchase price of the equipment must include all costs to bring the equipment into B.C. In many cases, the purchase price of the equipment can be depreciated (section 10 (3) of the Provincial Sales Tax Regulation (PSTR))
• Service vehicles, equipment, and tools used to repair and maintain exempt PM&E are not exempt. For example, a mill reline machine which is used to reline grinding mills, feeders and crushers at mining sites can cost over a million dollars; however, it does not qualify for the PM&E exemption
• Service providers are eligible for the PM&E exemption if they provide manufacturing services to mine operators (PSTERR section 103 (3))

Qualifying part of mine site

Determining the qualifying part of the mine site is complex as there may be more than one place of extraction, abandoned places of extraction, relocation of processing areas, etc. and the path of travel of the minerals from the extraction point to the finished product storage point is likely not a straight line and may change over time. Please refer to TIM PSTERR section 90(1), Qualifying part(c), R.2 for the steps to determine the qualifying part of a mine site.

Exploration and development activities

PSTERR 96 exempts machinery and equipment obtained for qualifying use in exploration for minerals or the development of mines. For the purposes of this exemption, qualifying activities include the initial construction of a mine site’s first tailings pond to the point where the mine can begin operating as a mine, and the initial construction of another tailings pond on the mine site to the point where the mine can begin using the pond. Gradual enlargement of a tailings pond through use of the pond is not a qualifying activity, because such activity occurs as part of the mine’s operation, not its development. Qualifying activities include preparation of a pit for use (such as removal of overburden) but not commercial extraction from the pit. Mine development can include development of a pit while other pits on the same site are in operation.

Refunds relating to the purchase, lease of equipment, machinery for the construction or maintenance of a road for a mine site

For the purposes of PSTERR 96, Exploration for minerals or development of mines, and PSTERR 97, Extraction or processing of minerals, the use of machinery or equipment in the construction or maintenance of roads within the qualifying part of a mine site is a qualifying use. PSTERR 95 cannot apply to any vehicles designed to be ordinarily used on a public highway. PSTERR 96 can apply to bulldozers, backhoes and excavators.

As the road construction and maintenance provisions are complex, refer to the TIM for details of refunds provided under PSTERR sections 120.1 and 120.2 (TIM PSTERR, section 120.1, Construction Or Maintenance Of Road For Mine Site and TIM PSTERR, section 120.2, Machinery Or Equipment Leased For Construction Or Maintenance Of Road For Mine Site).

Other

A mining company may hire a third-party consultant to review their books. Refunds are generally filed by the consultant on behalf of the company if the consultant believes the company has overpaid PST. The consultant may also determine that the company owes PST. On the advice of the consultant, the company may credit unpaid PST amounts to the PST payable account. Therefore, auditors should make sure that any errors found during the audit review are not already captured in the tax account. Review the credit entries to ensure that tax has been properly calculated and remitted on time.

Audit risk areas ‑ Motor fuel tax (MFT)

Coloured fuel is taxed at a lower rate and may only be used for the purposes authorized under MFTA 15. For the mining industry, the authorized use of coloured fuel includes the following:

• A tractor when used on other than a highway
• An industrial machine when used on other than a highway (see MFTR section 15.1 for a listing of designated industrial machines)
• A prescribed type of motor vehicle when used by the mining industry other than on a highway in respect of a mineral mining operation, including a motor vehicle with a temporary operating permit issued under the Commercial Transport Act (see MFTR section 15.2 (2) for a listing of prescribed vehicles)
• A stationary engine or portable engine
• A motor vehicle that is not licensed to operate on a highway

Tractors, unlicensed motor vehicles and designated industrial machines are authorized to use coloured fuel when proceeding to or returning from a location where the use of coloured fuel in the vehicle is authorized (MFTA section 15 (1) (k)).

Fuel (other than propane) purchased for use in making explosives is not fuel for the purposes of motor fuel tax, because it is fuel obtained for use other than for generating power by means of an internal combustion engine, and it is not hydrogen for use in a fuel cell vehicle. Therefore, it is not subject to tax under the MFTA.

Purchasers of non-fuel for explosives should inform their fuel supplier that they wish to purchase a 'petroleum-based liquid – for making explosives' and, prior to the sale, provide a Certificate of Exemption – Substances Sold for Use Other Than in Internal Combustion Engines form (FIN 480). This will allow the supplier to sell a substance which is not fuel and therefore not subject to the MFTA. However, this substance is subject to the provisions of the Carbon Tax Act (CTA) and PSTA.

Audit risk areas ‑ Carbon tax (CT)

Schedules 1 and 2 of the CTA sets out the different carbon tax rates. As noted in the PSTA section above, mining activities generally require a substantial amount of energy which may be acquired from out‑of‑province suppliers. If the out‑of‑province suppliers are not registered to collect tax, ensure that all carbon tax payable on fuel purchased from such suppliers has been self‑assessed and remitted in accordance with the CTA at the appropriate carbon tax rates on the total amount of litres of the fuel brought into and used in B.C. Self‑assessed carbon tax should be remitted using the Carbon Tax Return – Self Assessors form (FIN 112).

The following are subject to carbon tax:

• Fuel used to produce energy or heat
• Combustibles that are burnt
• Fuel used to dry coal
• Fuel used for the operation of equipment used to create coke
• Fuel used for the operation of equipment during the extraction, processing, production or transportation of minerals

CTR 17, Exemption for non-energy uses of fuel exempts the following from carbon tax:

• Fuel that is not combusted when used as raw material to manufacture anodes for use in an electrolytic process for smelting aluminum
• Fuel that is not combusted when used as a reagent to separate out coal or ores of metal in an industrial floatation process
• A person who combusts coke, high heat coal, or petroleum coke or a combination of them as a reductant in the production of lead or zinc. The person claims exemption from paying carbon tax otherwise payable under CTA 11, based on the rates set out in the table under CTR 17

Under section 20 of the CTA, a mining company may apply for a registered consumer certificate in relation to fuel if, during the company’s fiscal year that ended immediately before the date the company applies for the certificate, the company used at least 50% of the fuel for one or more of the purposes referred to in CTA sections 16 and 17 (1).

Relevant bulletins

Bulletin PST 100 - Safety Equipment and Protective Clothing (PDF, 317KB) (PSTA)
Bulletin PST 111 - Mining Industry (PDF, 373KB) (PSTA)
Bulletin PST 302 - Delivery Charges (PDF, 400KB) (PSTA)
Bulletin PST 310 - Goods Brought Into B.C. (PDF, 301KB) (PSTA)
Bulletin MFT‑CT 005 - Tax Rates on Fuels (PDF, 286KB) (MFTA and CTA)
Bulletin MFT‑CT 006 - Self-Assessing Motor Fuel and Carbon Tax (PDF, 195KB) (MFTA and CTA)

Section 5P – Oil & gas industry

Issued: 2014/02; Revised: 2019/06/15

Oil & gas industry overview (fossil fuel)

Oil and gas activities include exploring for, extracting, refining, transporting, and marketing oil and gas. The extraction of crude oil and natural gas occurs at wellheads. The fuels produced are commonly referred to as fossil fuels. There are two types of wellhead extraction: crude oil (petroleum based) and natural gas. Some wellheads extract both crude oil and natural gas. Common by‑products include propane, butane, and pentanes plus.

Crude oil (gasoline, diesel, and propane)

Crude oil is refined through a distillation process. At various temperatures, crude oil components are separated into many consumer products, from gasoline (petrol) and kerosene to asphalt and chemical reagents used to make plastics and pharmaceuticals. Crude oil is processed into petroleum products (including gasoline and diesel as defined in the Motor Fuel Tax Act (MFTA)), which are primarily used to power equipment and vehicles and are taxed under the MFTA and Carbon Tax Act (CTA). Note the various fuel definitions in both acts. The application of motor fuel tax (MFT) and carbon tax (CT) to a particular fuel, especially diesel, depends on which particular definition the particular fuel meets because of the particular fuel’s use. Some fuels, such as low viscosity diesel used for heating and non-motor fuel oil, are not subject to motor fuel tax. Such fuel is generally subject to provincial sales tax (PST). Fuel is transported by pipeline, railcar, tanker truck, tanker ship and barge.

Natural gas

Natural gas is refined through a purification process. Before it can be used as a fuel, it must undergo processing to remove impurities, to meet the specifications of marketable natural gas.  Compared with most crude oil products, there are fewer types and uses of natural gas. Most natural gas is transported by pipeline only; however more natural gas is being transported by rail to relieve pressure on the pipelines infrastructure. Most natural gas is taxed under the Provincial Sales Tax Act (PSTA) as an 'energy product' (see PSTA section 1). Natural gas used in the production or refining process in a stationary internal combustion engine is subject to MFT and CT and exempt from PST under PSTA section 140.

Propane

While crude oil and natural gas can occur in nature, propane is a by‑product of either petroleum refining or natural gas processing. Propane can be subject to MFT even if it is not used to power an internal combustion engine. Non-exempt propane purchased in B.C. is subject to CT at the time of purchase; non-exempt propane imported into B.C. for use is subject to CT when it is used in B.C.

Propane is the most common source of energy in rural areas that do not have natural gas service. Its primary use is residential; however, it may also be used in farming (such as to dry corn and to power farm equipment and irrigation pumps). Some industries use propane to run equipment, such as forklifts. While only a small fraction of propane is used in combustion engines for transportation, it is the second largest alternative transportation fuel in use, including in vehicles used by school districts, government agencies, and taxi companies. Although propane has many uses, it takes only one form. It is transported mostly though pipelines and in tanks on vehicles, railways, and barges.

Other gas and oil by-products include butane, ethane and pentane plus.

Websites and useful reports

TACS reports

TACS can be used to generate reports, by tax and volume amounts, of all fuel reported to the Ministry of Finance. Auditors can use such reports to verify volumes sold, purchased or used in a reporting period.

Website reports

Detailed information about oil and gas in B.C. is available on the following websites:

• Ministry of Energy, Mines and Low Carbon Innovation
  • A listing of facilities by client name is available on this site. This report is not as comprehensive as the report from the Oil and Gas Commission, as it only gives the facility name, facility code, and type
• Natural Gas and Oil Division 
  • The Natural Gas and Oil Division of the Ministry of Energy, Mines and Low Carbon Innovation website provides an overview of oil and gas in B.C., including oil and gas production and distribution statistics, data about resource potential, and information on the ministry's oil and gas initiatives and policies
• Oil and Gas Commission 
  • The Oil and Gas Commission regulates the crude oil, natural gas, and pipeline activities in B.C. This site includes information on the B.C. oil and gas industry activities and regulations. All producers must submit the 'BCS1 - Monthly Production and the BCS2 – Monthly Disposition Statements' to report for the purposes of petroleum and natural gas royalties. These reports may be requested from the taxpayer (MFTA section 41 (2) (a); CTA section 43 (1) (a))

Facility index report

This report is useful in identifying a facility name and type, operator location by Land Site Description (LSD), as well as other stats on equipment, such as equipment used, compressor size, power in kilowatts, and power converted to horsepower (HP). You may need to set‑up an account with the Oil and Gas Commission to access this report. Once the account has been set up, select the 'Data Downloads' and choose 'Facility Index in ASCII Format with Comma Delimiter'. Other reports that may be useful are in 'BC Pipeline and Facility information'. Here you can find a list of equipment under 'Equipment Detail' of equipment type by site number. In addition, Kermit can be accessed from within the Oil and Gas Commission to provide details for each facility from the facility report above. Details such as equipment lists, whether a site is active or inactive, schematics, etc.

To determine whether a well site, plant location or point of use is in B.C. or Alberta, refer to the Land Site Descriptions (LSD) based on a grid system. B.C. uses the National Topographic System (NTS) while Alberta uses the Dominion Land System (DLS). Request the grids from the taxpayer and establish the grid location. This land code can be traced to a physical site location by entering it into SCADA link, which provides you with a Google map of each location. B.C. grid locations can also be distinguished from Alberta grid locations, as they have a different series. B.C. will have a series of letters and numbers, such as d‑35‑H and A‑36‑c, and Alberta will have a series of numbers and both may have a W for West, such as 12‑13‑015‑12W3.

Gas analysis reports

This report can be used to determine a taxpayer’s zone or region, and specific equipment (for example compressors). A gas analysis report contains information on BTU values, hydrocarbon content and other components, and is required for each gas field. Using the data in a gas analysis report, a CTAB fuel tax sector specialist can assist the auditor in verifying the taxpayer’s load calculation and hourly consumption rate for each compressor, based on the engine specifications and BTU value. The load factor will have a direct bearing on consumption; engine drivers do not always run at full load. An engine's load factor, which is the portion of the engine's rated power that actually performs work, can be the most useful variable in estimating the engine's fuel consumption. At a given RPM, the engine's fuel consumption can be more a product of the load factor than simply the engine's type and rated power.

Various engineers reports

There are various types of engineers’ reports that may be helpful in calculating fuel usage, such as 'Fuel Combustion Calculations', 'Major Fuel Rotating List', 'Rig Activity Reports' and 'Composite Reports'. Auditors should discuss operations with a production manager of a well site to understand equipment utilization and ascertain which reports are available.

Other operational records

Verification of fuel usage in equipment will be an important step in the audit. Businesses are not required under legislation to keep records of fuel usage by equipment or vehicle. To verify whether the right amount and rate of tax was paid on own use, the auditor may have to estimate fuel usage. Businesses will keep other records relevant to their operation, such as time cards, job site locations, travel time, etc. These records can be used in the estimated calculations of equipment and vehicle utilization.

Equipment fuel utilization reports

For some equipment, standard fuel usage data can be found on the equipment manufacturer’s website.

Conducting the fuel audit

This section focuses on fuel audits. Motor fuel tax (MFT) and carbon tax (CT) audits are conducted differently than provincial sales tax (PST) audits, as the tax applies to volume amounts not dollar amounts. This means that auditors may not find tax liabilities in general ledgers, accounts or financial statements typically examined in a PST audit. Some examples of useful reports are listed above.

For this industry, MFT, CT and PST audits are conducted simultaneously. Therefore, it is important for the auditor to conduct considerable research and have a firm understanding of how tax, exemptions and tax rates apply under each act. For example, it is important to note that natural gas is not part of the security scheme under the MFTA and CTA, and that most sales of natural gas are taxed under the PSTA because it is not used in a internal combustion engine (see PSTA definition of 'tangible personal property' and section 140). Most natural gas is not fuel as defined under the MFTA (In order to be exempt under PSTA section 140, natural gas must be a fuel). Natural gas that is fuel as defined in the MFTA (such as natural gas used in a stationary internal combustion engine) is generally subject to MFT and CT. It is generally subject to CT when it is sold to a purchaser (CTA section 8), and when it is used (CTA section 11). For the purposes of CT, natural gas can be used even when it is not combusted (for example when pressurized natural gas is used to drive moving parts on equipment). Auditors must understand the intent of the following acts.

PSTA

All fuel is tangible personal property (TPP). Therefore, any fuel obtained for use in B.C. is subject to PST unless an exemption applies. The following fuels are those most commonly exempted from PST: fuel as defined in the MFTA; fuel obtained solely for the purpose of being processed, fabricated or manufactured into, attached to or incorporated into other TPP for retail sale or lease; fuel obtained as a residential energy product solely for residential use in a residential dwelling; and natural gas and fuel oil obtained by a 'qualifying farmer' for use solely for a farm purpose.

MFTA 

Unless an exemption applies, MFT applies to any fuel sold for use or used in an internal combustion engine.

CTA

Unless an exemption applies, CT applies to the following: any fuel included in Schedule 1 of the CTA that is purchased in B.C. or brought into B.C. for use ('use' of fuel includes any use, even if the fuel is not combusted); any combustible included in Schedule 2 of the CTA when it is combusted within B.C.

The PST audit for this industry should be conducted consistently with PST audit procedures (see Chapter 2 of this manual). However, certain industry specific risks will be noted for PST.

Fuel producers

Some fuel producers engage only in fuel production. Others engage also in exploration and development, not only by extracting and producing fuel at proven sites, but also exploring for and developing those sites.

Companies engaged in the exploration for and production of oil and natural gas are the primary risk‑takers in the search for deposits of hydrocarbons. To diversify the risk, companies will often form joint venture operations, where several companies each undertake a percentage of the total risk and related financial commitment. In joint venture operations, one company will act as the operator of the property, with the other participants acting only as financial contributors.

Oil and gas producers must first apply to the Oil and Gas Commission for the assignment of a lease, licence or right of way at a location. When the assignment has been obtained, the oil and gas producer is then able to proceed with drilling a well or building a pipeline, compressor station or gas plant.

Some oil and gas producers and retailers are covered by the recurring audit program (RAP) and are also required to report to the Ministry of Energy, Mines and Low Carbon Innovation (EMLI) with respect to renewable low carbon fuel regulations requirements (RLCFRR). Under the terms of an agreement between CTAB and EMLI these taxpayer’s will be inspected by CTAB at the rate of three inspections per annum on a three-year rotational basis. An effort will be made to co-ordinate the EMLI Inspections with the RAP three-year rotation.

Audit risk areas ‑ Provincial sales tax (PST)

Purchases ‑ PST

As with any other PST audit, areas to examine are tax accounts, sales, purchases and capital assets. See Chapter 2, General audit processes and audit procedures in this manual.

Areas to examine specific to the industry include:

• The operator of the leased property is traditionally responsible for providing most of the materials and supplies consumed in drilling and production activities. Supplies are usually obtained outside B.C. and may not be PST-paid (PSTA Division 4 and 5)
• There may be equipment brought in from out of province
  • Determine if the equipment qualifies for temporary-use PST calculated using the 1/3 or 1/36 formula; see Bulletin PST 310, Goods Brought Into B.C.
  • Ensure that the purchase price of the equipment includes all relevant amounts described under PSTA section 10 and, if applicable, that it was depreciated at the correct rate over the correct number of periods

• There may be entries in the general ledger relating to the reversal of PST for goods purchased in B.C. but sent to an Alberta location ‑ ensure the goods were in fact sent to Alberta and that the business obtained a refund under PSTA section 158 or, if the goods were exempt under Provincial Sales Tax Exemption and Regulation (PSTERR) section 26, under PSTA section 152(1) and did not deduct the reversed amounts from any PST the business was required to report and remit to the province
• Few taxable sales occur; usually there are only occasional sales of equipment or supplies at the retail level
• There may be several cost centers or responsibility centers for B.C. operations
• All purchases usually originate through the industry standard Authorization for Expenditure (AFE) system, and each capital project will have an AFE number assigned to it. Request a listing of all AFEs within B.C. for each year in the audit period
• Consider auditing 100% of the AFEs if the number is manageable
• Consider using sampling and proration if the number of AFEs is too great
• Where sampling and proration is used, structure the test to include all levels of spending relative to AFE size (such as <500,000, <1,000,000, ≥1,000,000)
• The PSTERR provides an exemption for exploration and extraction equipment (PSTERR section 94). Most drilling rigs will be exempt under this section. A review of the 'Drilling Rig Register' may provide information about which rigs were used in B.C. during the audit period
• PST is generally payable on 100% of the cost of supplies (such as chemicals and mud used to help stimulate flow of a well), cement purchased to fill well holes, freight that must be included in the purchase or lease price of non-exempt equipment, methanol purchased for use as a cleaner, and taxable equipment rental from Alberta-based companies
• Well‑site equipment and repair parts may be exempt under PSTERR section 95 or 108
• Non-exempt materials and any other inventory obtained outside B.C. for use in B.C. are subject to PST under PSTA section 49
• Natural gas is not subject to the ICE levy when it is obtained for use as something other than an energy product, such as a fuel used in a stationary internal combustion engine including compressors that compress natural gas
• Natural gas that is not fuel for the purposes of MFT is generally subject to PST
• The taxpayer acquires the assets of another oil and gas company and excludes acquired equipment in their self-assessment calculations

Audit risk areas ‑ Motor fuel tax (MFT)

Collector ‑ Motor fuel tax

A collector, who within B.C., sells a fuel for the first time after the fuel is manufactured in B.C. or imported into B.C. must pay MFT security on the fuel equal to the MFT that would apply if the fuel were sold to a purchaser (MFTA section 38). If the collector sells the fuel to a wholesale dealer or retail dealer, the collector collects security on the fuel. If the collector sells the fuel to a purchaser, the collector collects tax on the fuel. Assuming the collector remitted the correct amount of security and collects the correct amount of security or tax, the collector can retain the security paid by the wholesale dealer or retail dealer or the tax paid by the purchaser.

The onus is on the collector to maintain sufficient appropriate accounting of amounts reported to the ministry. A collector who collects excess tax or security on fuel must report and remit that excess to the ministry. The ministry can assess a penalty for failing to do so.

Sales volumes are typically very high, so an auditor should conduct a control test to ensure an adequate methodology to determine sales by volume and the applicable tax rates.

There may be fuel recording systems managed under a specialized accounting package, such as SMS/SAP. The sales journal may contain the shipping point, customer number, date, type of fuel sold, destination point, quantity in liters, fuel tax collected, Greater Vancouver Transit tax and Victoria Transit tax. It may produce numerous tax reports; for example, by customer, fuel type or delivery location showing the quantity of fuel sold. An auditor may use these reports to verify the correct sales volumes.

Review in detail the collector’s Generic Motor Fuel Tax Return, the South Coast British Columbia Transportation Tax Return (FIN 427) and the British Columbia Transit (Victoria) Tax Return (FIN 450) to ensure correct calculation, volume, and application of tax or security remitted.

There may be sales or trades/exchanges between refiners‑collectors.

A collector who sells fuel as a retail dealer must satisfy the requirements of MFTA section 34, including by collecting tax from the purchaser, even if the collector sells the fuel through a franchise. If the collector owns fuel at the time of a rate change, the collector may have to satisfy the requirements of MFTA section 40.1 by providing an inventory of the fuel and remitting security that becomes payable on the fuel because of the rate change

Deputy collectors – Motor fuel tax

A wholesale dealer who buys fuel from a collector or deputy collector is deemed, with respect to that fuel, to be appointed as a deputy collector by the collector or deputy collector. As a deputy collector, the wholesale dealer pays security on the fuel to the collector or other deputy collector, and in most cases the collector or other deputy collector retains that security, having already paid or remitted the same amount of security on the fuel.

The onus is on the deputy collector to maintain sufficient appropriate accounting of amounts paid to collectors and other deputy collectors and amounts reported and remitted to the ministry.

A deputy collector who receives excess security on fuel must report and remit that excess to the ministry. The ministry can assess a penalty for failing to do so.

Review the deputy collector’s Generic Motor Fuel Tax Return, South Coast British Columbia Transportation Tax Return (FIN 427) and British Columbia Transit (Victoria) Tax Return (FIN 450) to ensure correct calculation, volume, and application of tax or security remitted.

Retail dealers – Motor fuel tax

A retail dealer pays security on fuel the dealer buys for resale.

The retail dealer collects, and in most cases retains, tax from the purchaser when the retail dealer resells the fuel.

A retail dealer who buys clear gasoline or clear diesel within B.C. but outside the SCTA or VRTA and resells the fuel inside the SCTA or VRTA (where dedicated taxes apply) must report and remit an additional amount to the ministry equal to the difference between the security the retail dealer paid on the fuel and the total tax the retail dealer collected (including the dedicated motor fuel taxes) on the fuel.

 A retail dealer must report and remit any amount of tax the retail dealer collects on fuel that exceeds the amount of security the retail dealer paid on the fuel.

A retail dealer who has collected the correct amount of tax on fuel may apply to the ministry for a refund if the amount is less than the amount the dealer paid as security on the fuel.

Audit risk areas ‑ Carbon tax (CT)

Sales ‑ Collector ‑ Carbon tax

Verify each line item on the collector’s return form (FIN 175).

There are some specific steps for carbon tax audits, such as verifying documentation from registered consumers such as air and marine services.

Purchases ‑ Self‑assessor ‑ Carbon tax

For a description of equipment found at the well site, refer to “Purchases – Self‑Assessor Motor Fuel Tax” section of this manual.

• Calculation errors due to incorrect formulas used to calculate tax payable
• Failure to account for unusual transactions such as barter agreements for the exchange of gas for a taxable use in the province
• Failure to account for non-exempt uses of fuel in all equipment (such as leased fuel, flaring, venting)

Motor fuel tax and carbon tax for coloured fuel – Common errors

A person must not colour fuel unless authorized to do so by an authorization, and a person must not sell coloured fuel unless the person has an authorization to sell coloured fuel. An authorization to sell coloured fuel also allows the person to sell heating oil and coloured non-motor fuel oil for use other than in internal combustion engines.

Effective July 1, 2015, a retail dealer must obtain a signed copy of the Coloured Fuel Certification (FIN 430) before selling coloured fuel to a purchaser at the coloured fuel rate:

• Through a card-lock, including at a terminal rack or bulk plant, or
• In an amount greater than 45 litres

A FIN 430 is not required in the following cases. However, in several the retail dealer must obtain another certificate.

• The retail dealer transfers coloured fuel of any type directly into the supply tank of a ship or a boat that is on or in the water at the time of transfer
• The retail dealer transfers clear marine diesel directly into the supply tank of a ship that is on or in the water at the time of transfer
• The retail dealer sells fuel to a farmer and obtains a completed and signed Certificate of Exemption – Farmer (FIN 458), or a copy of the farmer’s valid Farmer Identity Card issued by the B.C. Agricultural Council
• The retail dealer sells fuel to a First Nations individual or band, the sale occurs on First Nation land, and the dealer obtains documentation described in bulletin MFT-CT 002 Sales to Status Indians and Indian Bands, and the Fuel Tax Exemption Program
• The retail dealer sells locomotive fuel and obtains a Registered Consumer Certificate for locomotive fuel
  • Note: Authorized coloured fuel sellers may sell coloured diesel fuel to a registered consumer as locomotive fuel if the invoice shows the coloured diesel is being sold for use in a locomotive (for example coloured diesel sold as locomotive fuel)
• The retail dealer sells clear or coloured non-motor fuel oil and obtains a completed and signed Certificate of Exemption - Substances Sold for Use Other than in Internal Combustion Engines (FIN 480)
• The retail dealer sells coloured diesel, coloured gas, coloured marine diesel, coloured locomotive or coloured non-motor fuel oil, to a customer for resale purposes and that customer is also an authorized coloured fuel seller. A current listing of all businesses authorized to sell coloured fuel is available on our website

A person who purchases coloured fuel for an unauthorized use must self-assess and pay the difference between the coloured fuel tax and the clear fuel tax that should have been paid on that fuel. If the person fails to do so, the person can be assessed a penalty equal to the greater of:

• Three times the clear fuel tax that should have been paid, or
• An amount of up to $1,000 for each vehicle per day

The person may be assessed penalties for all unauthorized purchases or uses during the previous four years.

Motor fuel and carbon tax collector returns for all fuel types – Common errors

• Tax rates and tax codes for various categories of fuel are incorrect
• The taxpayer is unfamiliar with the security scheme
• Incorrect fuel tax rates used for dedicated or transit taxes, and to status lands
• Fuels invoiced to areas with lower tax rates are in fact delivered to areas with a higher tax. A third-party confirmation may be required
• The taxpayer reports fuel volumes as an import/export instead of an acquisition/disposition on the generic fuel tax return
• Ineligible volume adjustments
• Not reporting imported fuels
• Rebranding errors
• Invalid exempt sales
• The taxpayer fails to report and remit all taxes collected on sales (for example because the taxpayer does not properly account for tax collected)
• The taxpayer assumes tax has been paid on fuel from a supplier, when in fact it has not
• A retail gas station was set up incorrectly in the taxpayer’s database, thus the additional transit taxes are missed

Motor fuel and carbon tax self-assessor returns – Common errors

Readily available supplies of natural gas at the wellhead, or in the gathering system, are typically utilized to run equipment in field operations. This is often referred to as 'lease gas'.

Some reasons for common errors in self-assessing tax:

• The taxpayer fails to include tax payable in a given month in the reporting period. (for example because the taxpayer’s system does not account for fuel usage, or they do not consolidate usage at all facilities)
• The taxpayer does not realize that tax applies to the taxpayer’s use of leased fuel (lease fuel is the industry term used for natural gas used in well, field and lease operations, such as gas used in drilling operations, heaters, dehydrators and field compressors)
• The taxpayer assumes tax has been paid on fuel from a supplier, when in fact it has not
• The taxpayer listed as an operator of a facility enters into an agreement with another oil and gas company to operate the facility. It is common to have joint ventures/partnerships in this industry. It is important to establish who the user of fuel is. Typically, it is the operator who is the user of the fuel and therefore the person responsible for paying tax on the fuel. The operator may be unaware of tax obligations
• The taxpayer acquires the assets of another oil and gas company and excludes acquired equipment in their own motor fuel tax and carbon tax self-assessment calculations
• Failure to account for non-exempt uses of fuel in all equipment (such as leased fuel, flaring, venting)
• Calculation errors due to incorrect formulas used to calculate tax payable
• Deputy collectors or retail dealers not completing FIN 103 Carbon Tax Return – Inventory relating to carbon tax rate changes

Examples of working papers for calculating fuel used by producers

Create a summary of all facilities that should be included in the audit using the Oil and Gas Commission 'Facility Index Report'.

Facility name NTS or DLS number	Facility code	Facility type	Comments
Slickland bf/94‑a‑15	5132	Compressor central dehydrator	Large compressor active flaring
Slimmeyland 14‑12‑9000‑16w6	3078	Central gas dehydrator	Not active

Calculate fuel usage by volume for each piece of equipment using the utilization rates from reports as detailed above in the 'Websites and Useful Reports' section, located in this section of the manual.

Motor fuel tax calculation

Calculate all fuel consumed in combustion engines.

Month	Volume (e3M3)	M3	Lt	Lt/810.32	Tax rate	Tax amount
Jan 18	2,080.10	2,080,100	2,080,100,000	2,567,011	0.0110	$28,237.12
Feb 18	2,343.40	2,343,400	2,343,400,000	2,891,944	0.0110	$31,811.38
Total tax owing						$60,048.50

Carbon tax calculation

Calculate all fuel used to power compressors, generators, line heaters, flare stacks, etc.

Month	Volume (e3M3)	M3	Tax rate	Tax amount
Jan 18	2,697.60	2,697,600	0.0665	$179,390.40
Feb 18	2,364.10	2,364,100	0.0665	$157,212.65
Total tax owing				$336,603.05

Provincial sales tax calculation

Calculate all natural gas consumed in equipment without combustion engines, such as line heaters. (Note: you can only assess for PST if the fuel is purchased or lease fuel that has royalties paid on it.)

Month	Volume (e3M3)	Unite price	Tax rate	Tax amount
Jan 09	2,697.60	100.00	0.07	$18,883.20
Feb 09	2,364.10	100.00	0.07	$16,548.70
Total tax owing				$35,431.90

Fuel wholesalers (bulk agents)

Most bulk agents are wholesalers of bulk fuel that has already been sold in B.C. and deputy collectors under MFT and CT.

Even though bulk agents are persons separate from the large oil companies, many do not operate independently from the companies. For example, it is common for a bulk agent to lease its buildings and land, and even equipment, from the oil company. The agent is responsible for the storage of fuel. Fuel is either owned by the oil company or by the independent bulk agent. If the fuel is owned by the oil company, the agent is required to provide the oil company with weekly accounting of sales and inventory, which the oil company audits periodically. Independent bulk agents who own their own fuel in storage require closer audit coverage by the branch. Some independent bulk agents maintain records, including support for exempt sales, at their own locations rather than with the oil company.

The oil company pays the agent a handling allowance, normally a contractual amount of up to 0.5%. The rate depends on several factors, such as volume, product and history of the agent. Officially, the allowance covers legitimate shrinkage due to venting and spillage. Gasoline is usually provided a higher allowance due to its volatility compared to other distillates, such as diesel fuel and furnace oil. Also, the volume of fuel will vary due to temperature. For this reason, fuel is normally bought and sold at a temperature-adjusted volume. If the value of the shrinkage exceeds the allowance, the oil company charges the agent for the difference. After provisions are made for shrinkage, any shortage discovered by the oil company is charged to the agent at the time of the oil company audit.

An oil company’s remittances (typically of security) should reflect volumes sold by the company’s agent. Of course, results, by product, from the oil company audit that involved volume adjustments would have to be considered during reconciliation. Also, as an example, if the agent sold clear fuel but charged MFT at the coloured fuel rate, the agent must be assessed a penalty equal to the difference between tax at the clear rate and tax at the coloured rate.

Previous audits and inspections have shown the following to be problems commonly found in agents' reported sales:

• Sale of marked fuel but delivery of clear fuel to a customer
• Unrecorded sales covered by shrinkage allowance
• Failure to record fuel consumed in agents' own vehicles
• Sale of diesel reported as an exempt sale of furnace oil qualifying for residential use reported as miscellaneous cash heating sale
• Pre‑invoicing at times of tax rate increases
• Sale of heating fuel to non‑residential customers exempt from tax

The problems identified above would lead to an assessment for failure to collect / remit tax. Third party verbal / written confirmation may be required.

Conducting the audit

The following guidance is general. Specific audit steps must be tailored to each audit.

Audit preparation

Limit initial audit procedures to testing a small sample of sales. If problems are found, expand the test sample. The test sample should fall within the period covered by the oil company stock audit, as audit findings are to be compared to the results of the oil company audit with differences considered for assessment. The following records will be required for the test sample:

•  Oil company stock audit reports
• Unassigned sales invoices
• Record of the agent's own consumption. Some agents maintain a log book indicating fills and odometer readings. Many agents invoice themselves at the time of use and include the invoices with other daily unassigned sales
• Sales summary of unassigned sales invoices
  • Often the agent will prepare a dollar value sales journal by product for accounting purposes and a volume-based summary for reporting to the oil company. Both summaries are required for audit purposes
• Stock position statement showing product throughput by category
  • This report details volumes of all fuel moved during a specified period (usually one week), including purchases from the oil company, both assigned and unassigned sales (including cardlock sales), transfers, re‑branding, and beginning and ending inventories
• Billing statement from the oil company detailing all unassigned sales reported by the agent
• Load slips and related Transportation of Dangerous Goods forms (TDGs)
• Oil company's assigned sales invoice register and related assigned sales invoices
  • This record may be combined with details of the agent's own sales or as a separate document. Normally copies of the assigned sales invoices are attached
• Cardlock statements separately detailing the agent’s sales and the oil company’s sales
• Oil company invoicing and bills of lading for deliveries of fuel into inventory
• Dye reports from the fuel tax section
• Exempt sales documentation such as Coloured Fuel Certification (FIN 430) or Certificate of Exemption - Farmer (FIN 458)
• Facility Index Reports
• S2 reports

Overall analysis of sales

Obtain copies of reports which list current fuel sales made by the agent. The reports should include all sales during the period (assigned and unassigned), and for each sale they should show the volume, fuel type and customer’s name and address. Separate reports are available for keylock / cardlock sales, assigned sales, and agent's own bulk delivery. Reports that do not accumulate data on an annual basis are often voluminous; therefore, for monthly reporting periods, select a current representative period of two or three months. Include months in different seasonal periods to ensure a good sample of purchasers and products are identified.

Use your knowledge of the business and its industry to analyze the information on the print‑out. This information is useful for selecting audit leads.

Fuel users

There are various categories of fuel users who get tax exemptions or advantages on fuel purchases under MFTA and CTA. Some are required to self‑assess on use. This may be because of change in use or because they have an agreement with the government (Registered Consumers, Registered Air or Registered Marine) to buy exempt and pay when the fuel is used for a non-exempt purpose. It may also be because it is not possible at the point of sale to establish taxable use. There are also businesses that buy fuel at a high rate, use the fuel for a purpose that qualifies for a lower rate, then apply for a refund.

The MFTA and CTA require taxpayers to maintain adequate accounting records. A taxpayer is free to adopt any accounting method they choose provided the chosen method supports the taxpayer’s reported and claimed amounts on their returns. Therefore, auditors must be able to understand a variety of accounting methods. During any audit, the auditor must become familiar with the taxpayer’s chosen methods (for example through discussions with management, and by tracing transactions through the system), and describe those methods in the knowledge-of-business section of the audit file. If audited amounts are calculated based on estimates, the auditor should devise appropriate tests for verifying the reasonableness of the estimates and the correct calculations of the amounts. The auditor can use analytical review to determine where audit risk is. If an auditor must estimate or calculate an assessment, the auditor should ensure that the estimate or calculation is reasonable based on the taxpayer’s industry and the specific business operations.

The following are common situations where the auditor may have to estimate or calculate. This is not an inclusive list.

Motor fuel tax

• Coloured Fuel
  • Some businesses buy clear and coloured fuel inventory and then use it for both off‑road and on‑road, such as mining and logging
• Coloured Fuel Rates
  • Some businesses purchase clear fuel for authorized coloured fuel use and apply for a refund of the difference in tax rates
• Farming Exemption
  • Farmers including aquaculturists may buy coloured fuel and claim a refund of the tax paid at the coloured rate

Carbon tax

• Registered Air and Marine
  • If most of their business is outside of B.C. they may be registered to buy fuel exempt and self‑assess carbon tax on fuel they use in B.C. for a non-exempt purpose
• Combustibles
  • The cement industry and pulp and paper industry buy tires to burn to create energy. Typically, they self‑assess tax when they purchase the combustibles even though they do not have to until they use the combustibles

Example of working papers for fuel users

This is a template created from typical audit examples. It is not required, and you may find a more efficient way to conduct your test.

Total the fuel purchases for the audit or sample period. Is there a fuel inventory? Look for opening and closing balances to reconcile total fuel used for the period.

Date	Supplier	Invoice number	Clear	Coloured
12/15/11	ABC Fuel	23756	50	100
12/30/11	ABC Fuel	23869		80
01/01/12	Burns Fuel Sales	1055	150
01/02/12	Burns Fuel Sales	1162		180
Total litres of fuel purchased			200	360

Prepare a summary of the equipment and establish eligible use.

Acquisition date	Description	Model/license	Eligibile/ineligible
05/23/08	Asphalt grader	(Higirl 5000)	Eligible
12/13/09	Road skidder	(Roadster X-25)	Eligible
10/22/09	Caterpillar	(Cat PS 150C)	Eligible
09/16/09	Ford pickup	141-SRB	Ineligible

Establish utilization hours, rates and fuel consumed for eligible purposes.

Use of equipment		Consumption rate of equipment per hour				Comsumed
Date	Job or Activity	Hours	Higirl 5000	Roadster X-25	Cat PS 150C	Litres
01/05/12	10-120th Street	5	8.85			44.25
01/05/12	150 - Scott Road	4		3.5		14
01/06/12	Robson Street	10			7.14	71.40
Total fuel used for eligible purpose						129.65
Total purchases for coloured fuel						360.00
Differential						230.35

Is there an explanation for the excess coloured fuel (for example in inventory, accidental spillage, etc.)?  If not, assess on differential.

Relevent bulletins

Bulletin PST 113 - Oil and Gas Industry – Producers and Processors (PDF, 424KB) (PSTA)
Bulletin PST 114 - Oil and Gas Industry – Exploration, Discovery and Development (PDF, 399KB) (PSTA)
Bulletin PST 115 - Oil and Gas Industry – Service Providers and Contractors (PDF, 330KB) (PSTA)
Bulletin PST 110 - Production Machinery and Equipment Exemption (PDF, 432KB) (PSTA)
Bulletin PST 310 - Goods Brought Into B.C. (PDF, 310KB)
Bulletin MFT 014 - Propane Exemptions (PDF, 265KB) (MFTA)
Bulletin MFT‑CT 001 - Fuel Sellers (PDF, 271KB) (MFTA and CTA)
Bulletin MFT‑CT 002 - Sales to Status Indians and Indian Bands, and the Fuel Tax Exemption Program (PDF, 330KB) (MFTA and CTA)
Bulletin MFT‑CT 003 - Coloured Fuels and Other Substances (PDF, 253KB) (MFTA and CTA)
Bulletin MFT‑CT 005 - Tax Rates on Fuels (PDF, 286KB)
Bulletin MFT‑CT 006 - Self-Assessing Motor Fuel and Carbon Tax (PDF, 195KB) (MFTA and CTA)

Section 5Q – Photographers

Issued: 2014/02; Revised: 2019/06/15

The following are some of the common risk areas related to this industry. This is not an exhaustive list.

Audit risk areas

Provision of a non-taxable photography service or sale of tangible personal property (TPP)

The service of providing photography is not a taxable service. Photographers generally sell something taxable by supplying tangible photos (such as in print or on a disc supplied by the photographer) that are not merely incidental to the photography service.

If the photographer supplies TPP along with a photography service, determine whether the supply is a sale or merely incidental to the service. If it is a sale, determine whether it is mandatory or optional with the service. Generally, the purchase price of a mandatory sale of TPP with a photography service includes the amount charged for the service, while the purchase price of an optional sale of TPP does not.

Production machinery and equipment (PM&E) exemption

Photographers can be 'manufacturers'. Their cameras, printers and other equipment can qualify for exemption under Provincial Sales Tax Exemption and Refund Regulation (PSTERR) section 92.

A camera can qualify for exemption under PSTERR section 92. Because a camera is mobile equipment, it may not be used primarily within the qualifying part of any manufacturing site. The auditor must determine the photographer's qualifying part and the ratio of use of the camera within that part to total use of the camera.

• If the camera is used primarily (over 50%) at the qualifying part of the manufacturing site (such as solely within the photographer's studio), it may qualify for exemption under PSTERR section 92
• If the camera is used exclusively off-site at various venue locations, most likely it does not qualify for exemption under PSTERR section 92
• If the camera is used at the manufacturing site and off‑site at various venue locations, the PM&E exemption only applies if that particular camera is used primarily at the qualifying part of the manufacturing site

Videographers and photographers

The way the videographer / photographer provides the video (moving pictures) can affect the way PST applies: a photographer provides only a non-taxable service by supplying the photos in intangible form only; the photographer sells TPP by supplying a printed photo or a photo on a storage medium supplied by the photographer; a photographer sells TPP by supplying a tangible video or film; the photographer sells a telecommunication service by supplying an intangible video via the internet to an electronic device ordinarily situated in B.C.

Equipment rentals

A photographer may have to pay PST on any rental or lease of equipment used to provide photography services, even if the photographer itemizes an equipment rental charge on the customer invoice and bills the customer for PST. The equipment is rented or leased for the photographer’s own use and is not for the purpose of renting it to the customer. However, if the photographer is a 'manufacturer' and obtains the equipment for qualifying use in manufacture, the photographer can claim exemption from paying PST on the rental or lease.

Photographers and printers exemption

Supplies a photographer obtains for use in the photographer's business can qualify for exemption under Provincial Sales Tax Act (PSTA) section 141 or PSTERR section 40. PSTERR section 40(1) applies in relation to darkroom methods of developing film and paper using chemicals; it does not apply to digital capture or digital printing. PSTA section 141 can apply to ink and paper obtained for digital printing, and discs and other storage media the photographer obtains for use in supplying photos for sale.

Relevant bulletins

Bulletin PST 107 - Telecommunication Services (PDF, 441KB) (PSTA)
Bulletin PST 109 - Printers and Publishers (PDF, 282KB) (PSTA)
Bulletin PST 110 - Production Machinery and Equipment Exemption (PDF, 432KB) (PSTA)
Bulletin PST 126 - Photographers, Videographers and Photofinishers (PDF, 493KB) (PSTA)

Section 5R – Railways

Issued: 2014/02; Revised: 2019/06/15

Summary

Canada’s railroad companies mainly transport freight. Their main sources of revenue include the following:

• Revenue from freight transportation, including freight transportation of other companies' rolling stock. Any amount a railroad company charges for any sort of freight transportation service is exempt from PST
• Revenue from renting or leasing railcars to other companies
• Revenue from passenger services

The following are some of the common risk areas related to this industry. This is not an exhaustive list.

Audit risk areas ‑ Provincial sales tax (PST)

Tax payment agreements (TPA)

An auditor who carries out a PST audit of a company that provides commercial rail services that offer interprovincial or international rail transportation of passengers or goods to members of the public for a fee must be familiar with the provisions of PSTA 32, Tax payment agreements, and PSTR Part 2, Tax Payment Agreements. The auditor must determine at the beginning of the audit whether the company and the director of PST have entered into an agreement authorized by those provisions.

Under such an agreement, the company pays PST on particular TPP or software directly to the government in the circumstances and manner and at the time specified in the agreement, rather than to the collector.

A TPA can apply to rolling stock, and it can provide for payments that are based on formulas or estimates referred to in the agreement. The auditor should document those formulas or estimates and determine whether the company has self-assessed and paid the applicable PST based on those formulas or estimates and in accordance with the agreement. The agreement may provide for use of applicable formulas found in PSTA 60, 62 and 63.

Interjurisdictional formula (PSTA sections 60, 62, and 63)

PST payable under PSTA 60, 62 or 63 is based on the following formula:

Amount = 7% x purchase price (or lease price) x (BC Usage / Total Usage) *

• Suitable measures of usage can be based on haulage (eg, gross ton miles) or use of equipment (eg, locomotive horsepower hours)
• PSTA 60, 62 and 63 allow usage to be based on reasonable estimates. PSTA 66 requires a periodic determination of actual usage and, if actual usage exceeds estimated usage, further payment of PST. PSTA 66(4) requires the director to pay a PST refund if actual usage is less than estimated usage

* The formula applies to qualifying conveyance parts as well as qualifying conveyances.

Rolling stock

• Interjurisdictional rolling stock is subject to PST under Division 6 of Part 3 of the PSTA. A person who has paid PST under PSTA 37 or 39 on rolling stock subject to PST under Division 6 can claim a refund of the difference between the PST paid under PSTA 37 or 39 and the PST payable under Division 6. Most interjurisdictional rolling stock used in B.C. is subject to PST based on the formula noted above. Rolling stock that has been sold and leased back is subject to PST under PSTA 61 or 61.1 using the formula shown under the applicable section
• The purchase price of a nonexempt related service provided to rolling stock is not subject to proration
• The railway company’s commodity tax department may rely on information from various other departments. There is a risk of noncompliance due to the omission of rolling stock use in B.C. from interdepartmental reports
• There are a significant number of leases of rolling stock
• There are various types of rolling stock. Some companies may not properly account for rolling stock as interjurisdictional railway rolling stock and therefore may not pay PST as required under Division 6 of Part 3 of the PSTA. An auditor must identify all interjurisdictional railway rolling stock of material value and ensure that all applicable PST has been paid on such rolling stock

Captive stock (rolling stock used in one jurisdiction only)

Nonexempt captive stock is fully taxable (for example not proportionately taxed under Part 3, Division 6 of the PSTA.)

PST becomes payable on captive rolling stock to which a tax payment agreement does not apply generally when the stock is purchased or leased in B.C. or, if it is obtained outside B.C., when it enters B.C. for use. PST can become payable at a later time if a taxpayer agreement applies to the stock. The auditor must determine whether PST has been paid at the appropriate time in accordance with the applicable rules.

The proportional PST rules of Part 3, Division 6 can apply to parts obtained for use on interjurisdictional railway rolling stock. They cannot apply to parts obtained for use on something other than interjurisdictional railway rolling stock, such as parts for captive rolling stock and parts for tracks, signal devices and other fixed assets.

Software coding and appropriate use of tax codes

Most railway companies use specialized software that can automatically calculate PST payable on nonexempt equipment used in B.C. An auditor who audits a company that uses such software must become familiar with the software and test it.

Audit risk areas ‑ Motor fuel tax (MFT)

The MFTA authorizes use of coloured fuel in a locomotive and taxes that fuel at $0.03 per litre. The MFTA taxes clear fuel obtained as locomotive fuel also at $0.03 per litre. Fuel obtained for use in a vehicle when run on rails (such as something other than a locomotive, such as a service truck) must be clear and is subject to a higher tax rate. Railroad companies obtain fuel for use in rolling stock used in and outside B.C.; such fuel can be subject to IFTA rules. The allocation of litres to various uses (for example use in locomotives, or use in B.C.) can be complex. Factors that determine the application of MFT and various rates include the following:

• Use of fuel in equipment used solely in B.C.
• Use of fuel in interjurisdictional railway rolling stock used in and outside B.C.

Example of formula used to calculate fuel usage:

Total fuel purchased is calculated, the total amount is then allocated to each province based on a ratio (calculated by distance and other relevant factors, such as horsepower per hour, weight of freight, terrain in each province).

Formula to calculate fuel usage

Description	Total Global Fuel Litres
Opening inventory	21,542,010
Receipts	84,513,425
Transfers	0
Fuel used by freight trains	-74,002,746
Fuel used in yards	-2,508,230
Ending inventory	29,544,441
Total consumption	29, 544,441
Fuel used in yards	0
Fuel to allocate to various provinces based on formula	76,510994

Detailed review of the fuel consumption formula is generally done by the home province, per the interprovincial tax agreement. Auditing of a specific jurisdiction’s reported fuel payments is left to the individual jurisdiction.

The auditor must determine whether payments of motor fuel tax during the audit period reflect changes in rates during the period. If the auditor determines that a railroad company obtained fuel at a rate that no longer applies, the auditor should consider raising an audit lead on the vendor.

Audit risk areas ‑ Carbon tax (CT)

• A railway company that operates as an interjurisdictional rail service can apply for a registered consumer certificate
• As a registered consumer, the company can obtain fuel exempt from carbon tax and self-assess carbon tax under CTA 11 when it makes nonexempt use of the fuel

Relevant bulletins

Bulletin MFT‑CT 004 - Registered Consumers (PDF, 139KB) (MFTA and CTA)
Bulletin MFT‑CT 005 - Tax Rates on Fuels (PDF, 286KB)
Bulletin MFT‑CT 006 - Self-Assessing Motor Fuel and Carbon Tax (PDF, 195KB) (MFTA and CTA)

Section 5S – Telecommunications

Issued: 2014/02; Revised: 2019/06/15

Overview

Telecommunication service is defined in section 1 of the Provincial Sales Tax Act (PSTA). The following are some examples of services provided by the telecommunication industry:

• Phone services
• Teleconferencing and videoconferencing services
• Cellular, radio telephone, and marine radio services
• Cable and satellite television services
• Cable and satellite voice and data transmission services
• Internet and other network services

Audit risk areas ‑ Provincial sales tax (PST)

The following are some of the common risk areas related to this industry. This is not an exhaustive list.

Sales

General

• The purchase price of a telecommunication service includes all relevant amounts described under PSTA 21
• Many of the telecommunication service providers in this industry have a large customer base or large product inventory and service lines. Use Computer Assisted Audit Techniques (CAATs) when auditing such providers. See Chapter 6 of this manual for CAAT procedures
• Review the inventory master tax codes to determine if goods and services are correctly coded as exempt or non-exempt in the system
• Audit a representative sample of exempt sales for assurance that exemptions are properly applied. The sample can be determined using an exempt customer listing, if the provider keeps one
• Long distance telephone services and internet‑based phone services, such as Voice over Internet Protocol (VoIP), do not qualify for exemption under PSTERR 83
• Television services provided by means of satellite or internet do not qualify for basic cable television services exemption under PSTERR 84. If a TV service includes exempt basic cable and non-exempt internet cable for a single price, the auditor must ensure that the bundled sales rules are properly applied. In most cases, PST applies to only the fair market value of the non-exempt service

Sales ‑ Access charges for telecommunication switching equipment

Telecommunication lines from the sites of a telecommunication service provider's various customers are generally routed to a centralized switching site maintained by the service provider. In some cases, the service provider bills their customers a separate charge for accessing the switching devices and multiplexers located at this site. The service provider may list it as a lease charge on the customer's invoice. See TIM PSTA, section 1, Lease, R.2, Access Charges for Telecommunications Switching Equipment for the appropriate interpretation of these charges. In most cases, such charges are included in the purchase price of the telecommunication service, as access charges, not in any lease price.

Sales ‑ Bundled sales

In most cases where a single price is charged for a nonexempt telecommunication service and something that is nontaxable or exempt (such as for nonexempt internet service and exempt basic cable TV service), PST applies to the fair market value of the nonexempt telecommunication service and not to any remainder of the single price. In some cases, PST applies to the entire single price (for example the nontaxable component is not available separate from the nonexempt telecommunication service).

Currently, many online subscriptions provide access to content other than non-taxable written content. Taxable content includes videos, software, audio books, music, etc. A single price charged for access to taxable and non-taxable content can be subject to the bundled sales rules.

Sales ‑ Dedicated telecommunication service

If a service provider claims to be selling or purchasing a dedicated telecommunication service, it is important to determine whether the service meets the definition of a Dedicated Telecommunication Service (PSTA section 1).

As noted above, a telecommunication service is taxable on the full purchase price; however, a dedicated telecommunication service can be subject to proportional PST based on the formula under PSTA 131(2): PST = 7% x B.C. distance ÷ total distance, where B.C. distance is the portion of the distances comprising the total distance (as defined in the section) that is within B.C.

A Virtual Dedicated Service is a telecommunication service where a customer’s data is not transmitted with other signals. However, the line used to transmit one customer's data is also used to transmit other customers’ data at different times. Because the virtual dedicated service does not involve dedicating a particular circuit to a particular customer, it does not qualify as a dedicated telecommunication service.

Purchases

General

• Telecommunication services may be purchased on an exempt basis if the services are purchased solely for resale (PSTA section 134)
• Large telecommunication providers usually have operations in several provinces. If a business uses a centralized purchase system from an out‑of‑province head office, ensure that PST has been appropriately paid or self‑assessed on TPP delivered into B.C. on the full landed cost
• Promotional and marketing materials, such as banners, signs, and flyers, are usually provided by a centralized print supplier. Ensure that PST has been properly self‑assessed or collected by the supplier on these materials delivered into B.C.
  • When a telecommunication provider engages in co‑operative advertising distributions with retailers and manufacturers, ensure that the provider has self‑assessed on its portion of the purchase price of the material, including its portion of any applicable transportation costs
• Telecommunication services, materials, and equipment acquired for non-exempt use or consumption in the delivery of goods and services are subject to tax. PST must also be self‑assessed on equipment taken from its resale or lease inventory for own use (PSTA section 132.1)

Telecommunication services purchased substantially for resale

A purchaser whose primary business is selling or providing telecommunication services is entitled to pay proportional PST on a telecommunication service the purchaser purchases for the purpose of selling more than 90% of the service to other persons. The purchaser is required to self‑assess PST on the portion of the telecommunication services for own use (such as used for office email) (PSTA section 130.1). If 90% or less of the service is stored, kept or retained for resale, the service provider must pay PST on the full purchase price of the service less any amount the service provider paid on the service under PSTA 130.1. See PSTA 130.3.

Capital Assets

General

• See the Purchases section above for discussion on centralized purchasing
• As many of the larger telecommunication providers operate interprovincially, review for any transfers of used assets into B.C. from the out‑of‑province locations. PST must be self‑assessed on the full purchase price, or (if the asset is depreciable) the full depreciated purchase price, of the asset, which includes the cost of transporting the asset into B.C. Section 10 (3) of the Provincial Sales Tax Regulation (PSTR) prescribes the various depreciation rates

Hardware and software

Telecommunication companies often require a significant amount of computer hardware and software for their operations. Perform a detailed review of the computer hardware and software purchases, including the licensing and service agreements. Note that large service providers may purchase taxable software that is installed on servers situated in another province but accessible for use by their B.C. operations. If PST was not paid on the purchase of such software, PST must be self‑assessed on the B.C. usage portion of total usage of the software (PSTA section 107).

Affixed machinery

Because affixed machinery is tangible personal property, the purchase or lease in B.C. of something that has been installed into or affixed to real property as affixed machinery is subject to PST unless an exemption applies. Any related service provided to affixed machinery used by a telecommunication provider is exempt if it is provided at the affixed machinery's real property site.

Telecommunication switching equipment is used to route electronic signals. Most older switching equipment is installed into or affixed to their buildings as affixed machinery, not solely for their better use; some may be improvements to real property (for example equipment that, due to its size, must be constructed on site). Much newer switching equipment, which tends to be smaller and more portable, is installed for better use of the equipment, rather than to improve real property. Racks for newer equipment typically become affixed machinery when they are installed into their buildings; freestanding racks remain normal tangible personal property.

An audit of a telecommunication provider's fixed equipment must take into account whether the equipment is an improvement to real property, or affixed machinery or other tangible personal property. If it is difficult for the audit team to classify the equipment, a PST ruling may be requested.

Other exemption

Other exemptions that apply to telecommunication services are found under the following provisions:

• PSTA section 134.1 – In relation to telecommunication activities outside B.C.
• PSTA section 134.2 – In relation to copying content of telecommunication service or broadcasting
• PSTERR section 83(2) – Certain telephone and communication services
• PSTERR section 84 – Basic cable television services
• PSTERR section 85 – Educational programs
• PSTERR section 86 – Photographers
• PSTERR section 87 – Data backup services
• PSTERR section 88 – Telecommunication service in relation to purchase of accommodation

Relevant bulletins

Bulletin PST 501 - Real Property Contractors (PDF, 340KB)
Bulletin PST 105 - Software (PDF, 425KB)
Bulletin PST 107 - Telecommunication Services (PDF, 441KB)
Bulletin PST 126 - Photographers, Videographers and Photofinishers (PDF, 493KB)
Bulletin PST 302 - Delivery Charges (PDF, 400KB)
Bulletin PST 310 - Goods Brought Into B.C. (PDF, 310KB)

Section 5T – Trucks

Issued: 2014/02; Revised: 2019/06/15

International Fuel Tax Agreement (IFTA) and International Registration Plan (IRP) team

Consumer Taxation Audit Branch (CTAB) has a team leader and audit team dedicated to performing IFTA and IRP audits. Each member of the team has an IFTA and IRP Auditor’s Handbook with all relevant manuals and resource materials.

The following is the CTAB-specific process for conducting an IFTA / IRP audit. All required forms, schedules and templates used during the IRP and IFTA audit are listed at the end of this section.

Trucking industry

Commercial trucking businesses (carriers) operating in B.C. pay provincial sales tax (PST), motor fuel tax (MFT), and carbon tax (CT) and may be audited in relation to any of those taxes. Carriers that operate multijurisdictional vehicles pay proportional PST according to rules that apply specifically to such vehicles, and proportional motor fuel tax under the International Fuel Tax Agreement (IFTA) scheme.

International Registration Plan

• The International Registration Plan (IRP) is a multijurisdictional arrangement that allows carriers to obtain a single licence and cab card for each of their MJVs. MJV carriers in B.C. pay insurance and PST on their MJVs to ICBC, which allocates a portion of that insurance and PST to each member jurisdiction in which the carriers operate MJVs, based on MJV travel in B.C. and the other jurisdictions
• PST rules that apply to MJVs are found in Division 7 of Part 3 of the PST Act [Multijurisdictional Vehicles]. Generally, an MJV carrier does not pay PST to the collector from whom the carrier obtains the MJV. Instead, the carrier pays PST annually based on the MJV's tax value and the ratio of the MJV's total travel in B.C. during the year to the MJV's total travel in all member jurisdictions during the year

International Fuel Tax Agreement

• The Intentional Fuel Tax Agreement (IFTA) is a single system for collecting and distributing motor fuel tax that applies to fuel based on where the fuel is consumed, rather than where it is purchased.
• Under IFTA, a B.C. carrier can operate an MJV in other jurisdictions without having to obtain any additional fuel tax registration and without additional fuel tax reporting requirements. The carrier files a single fuel tax return with B.C. each quarter, reporting the amount of fuel the carrier purchased and the distance the MJV travelled in each member jurisdiction during the quarter. The carrier makes a single fuel tax payment to B.C. for the net tax due as calculated on the return. B.C. then redistributes the tax to other member jurisdictions based on information in the return. B.C. issues the carrier a refund and collects taxes from other jurisdictions if the carrier purchased more fuel in those jurisdictions than it consumed in those jurisdictions.

Audits related to IRP and IFTA vehicles are raised generally to verify that the proration has been calculated and applied correctly, and that businesses are keeping accurate records. Although all auditors may conduct regular MFT, PST or CT audits on commercial trucking businesses, IFTA and IRP audits are conducted by the IFTA / IRP Audit Team because the mandate and process of the IFTA / IRP audit is very different than a typical audit and requires specific training and understanding.

IFTA and IRP audits are conducted under the mandate of two international governing bodies and the same audit procedures are used by all member jurisdictions, following the International Registration Plan Audit Procedures Manual and the International Fuel Tax Agreement Manual.

IFTA and IRP audits are subject to peer review by auditors from other jurisdictions. CTAB auditors may also be nominated to conduct peer reviews, at CTAB’s expense.

There are some CTAB‑specific internal procedures that exist, in addition to the audit procedures set out in the international manuals:

Audit selection

Audit selection is mandated by the international audit manuals. Three per cent of the carriers registered in B.C. under IFTA and IRP must be audited each year (There are approximately 1,500 participating carriers based in B.C.) The selection typically includes carriers that have not been audited previously, and those that have been flagged (for example for failing to file returns as required or for reporting exceptional amounts).

The IFTA team leader raises the audit.

Conducting the audit

An audit notification letter is sent by the IFTA manager to each selected carrier. Thirty days after the date of the audit notification letter, the auditor contacts the carrier and then sends out an Audit Engagement letter.

The process of selecting the sample periods is set out in the international manuals. Auditors select the most recent 12-month period for the sample. The sample period must be representative of the normal business operations of the carrier, and it must be noted in the standard CTAB-specific form, 'Test Period Selection Agreement' (stored on local LAN), which must be signed by the carrier, so that CTAB can show that the carrier has agreed with the selection.

• IRP – Any 12-month period starting when the licence is acquired. Distance period for the sample is always July 1 to June 30 (annual filing)
• IFTA – Based on calendar year

Records required from the carrier are set out in the international manuals, but other records may be requested or obtained by the auditor:

• IRP ‑ These records come from ICBC as it administers the tax and licence fees
• IFTA - FIN 360 Tax Return

The main purpose of the audit is to verify that the calculation, MJV vehicle tax value, and kilometers per jurisdiction are correct.

Some of the common risks and issues are:

• Smaller companies tend to keep less reliable records
• Some drivers fail to maintain adequate logs or have destroyed their logs (the National Safety Code requirements are to maintain log books for only six months)
• It can be difficult to obtain records from an operator of one truck who constantly travels with all records in the truck
• Some operators maintain manual trip logs, which can be difficult to verify; however, some may have GPS print‑outs

Audit conclusion

• IRP ‑ Reports are sent to all affected IRP jurisdictions and to ICBC
• IFTA ‑ Reports are sent to all affected IFTA member jurisdictions. Results are conveyed to the carrier by the auditor during the 'Closing Conference'

To help the carrier improve future reporting, the auditor should hold a documented closing conference with the operator during which any areas of non-compliance and any requirements and recommendations for improvement to the distance and fuel accounting systems are discussed.

The auditor will send the Audit Conclusion / Recommendation letter generated from TACS.

Section 5U – Vehicles

Issued: 2014/02; Revised: 2019/06/15

The following are some of the common risk areas related to this industry. This is not an exhaustive list.

Audit risk areas ‑ Provincial sales tax (PST)

Sales tax rates and taxable amount

PST rates greater than 7% apply to passenger vehicles $55,000 and over (Provincial Sales Tax Act (PSTA) section 34 (6) and Provincial Sales Tax Regulation (PSTR) section 5). The tax rate is based on the original purchase price (before coupons, trade‑ins, etc.). The PST payable is based on the purchase price after all qualifying reductions, such as a coupon reduction under PSTA section 23 or trade-in reduction under PSTA section 24. Note that effective April 1, 2018, further graduated rates apply to passenger vehicles obtained as taxable supplies for the purposes of GST/HST, and graduated rates apply to passenger vehicles obtained at private sales.

Dealer-use of vehicles for sale or lease

A vehicle dealer is exempt from paying PST on motor vehicles the dealer acquires solely for resale or for leasing to other persons.

A dealer that makes non-exempt use of a vehicle must pay PST on the vehicle. If the dealer makes qualifying use of a vehicle that is readily available for sale or lease by the dealer, the dealer can pay proportional PST on the vehicle, under section 84.1 of the PSTA and in accordance with Division 2 of Part 3 of the PSTR. See bulletin PST 117 - Motor Vehicle Dealer-Use and Manufacturer-Use Formulas.

Note: Vehicles that are provided to family members of the dealership owner are taxable at cost.

Energy conversion kits and fuel efficiency

Natural gas and propane conversion kits for internal combustion engines are exempt from PST. Kits to convert motor vehicles to operate solely on electricity are also exempt from PST. Prescribed aerodynamic devices are also exempt from PST if they are designed to reduce wind‑resistance and improve fuel efficiency. See Provincial Sales Tax Exemption and Refund Regulation (PSTERR) section 30(t)(i)-(vii).

Additional tax on lease of passenger vehicles

This includes passenger vehicle rental tax (PVRT) of $1.50 per day. PVRT is not applicable to leases under 8 hours or more than 28 consecutive days (PSTA section 43).

Sales to First Nations

A dealer that grants the First Nation exemption must obtain the required exemption documentation from the purchaser or lessee. If the dealer sells the vehicle, the dealer must ensure that title to the vehicle passes to the purchaser while the vehicle is on First Nation land. If the dealer leases the vehicle, the dealer must ensure that the lessee resides on First Nation land.

Auto repairs

Shop supplies

The purchase price of a vehicle repair or other related service includes any amount the service provider charges the purchaser for the provider's use of shop supplies in the service. PST applies to the amount the same way it applies to the service.

The service provider obtains the supplies for use and therefore pays PST on the provider's purchase price of the supplies.

Courtesy cars

Guidance on the application of PST to dealer-use courtesy cars is found in bulletin PST 117 - Motor Vehicle Dealer-Use and Manufacturer-Use Formulas. The rules are found under PSTA section 84.1 and PSTR section 25.

Tire and battery levies

Tire and battery levy amounts are not PST levied under the PSTA. They are included in the purchase prices of the goods to which they relate.

Warranties

Mandatory:

• The purchase price of a good includes any amount the purchaser must pay for a warranty in order to obtain title to the good under the sale
• The lease price of a good includes any amount that must be paid under the lease for a warranty that covers the good
• A person who provides a related service under the warranty can obtain TPP exempt from PST if, after the person provides the service, the TPP remains part of, or attached to, the warranted good and the person retains no interest in the TPP. The person does not have to be the warranty provider
• The related service of inspecting, repairing or replacing TPP under a mandatory warranty whose price is included in the purchase or lease price of the warranted good is exempt from PST if it is purchased by the warranty provider

Optional

• With scheduled services
• The purchase or lease price of a good does not include an amount charged for an optional warranty
• The purchase price of an optional warranty that guarantees the provision of related services (such as scheduled oil changes) is subject to PST under rules that apply to related services. If the warranty guarantees only exempt services, its price is exempt
• A person who carries out work under the warranty can obtain TPP exempt from PST if the TPP remains part of, or attached to the warranted good and the service provider retains no interest in the TPP after providing the service. The person does not have to be the warranty provider

As needed

• The purchase price of an optional warranty is non-taxable if the warranty does not guarantee anything to which PST applies
• A person who carries out work under the warranty can obtain TPP exempt from PST if the TPP remains part of, or attached to, the warranted good and the service provider retains no interest in the TPP after providing the service. The person does not have to be the warranty provider

The following table summarizes the rules discussed above:

	Optional Warranty, Specified Services Guaranteed	Optional Warranty, Specified Services Provided as Needed	Mandatory Warranty
Purchaser or lessee	Pays PST on the purchase price of the warranty unless the warranty guarantees only exempt services. Does not include the purchase price of the warranty in the purchase or lease price of the warranted good.	Does not pay PST on the purchase price of the warranty. Does not include the purchase price of the warranty in the purchase or lease price of the warranted good.	Includes the purchase price of the warranty in the purchase or lease price of the warranted good, and pays PST on the total purchase or lease price of the good (which includes the purchase price of the warranty) unless an exemption applies in relation to the good.
Warranty provider	Collects PST on the purchase price of the warranty, unless the warranty guarantees only exempt services. Depending on the facts, may be able to claim exemption under PSTA section 141.	Does not collect PST on the purchase price of the warranty. Depending on the facts, may be able to claim exemption under PSTA section 141.	Collects PST on the purchase or lease price of the warranted good (which includes the purchase price of the warranty) unless an exemption applies in relation to the good. Depending on the facts, may be able to claim exemption under PSTA section 141 and PSTERR section 77.

Relevant bulletins

Bulletin PST 116 - Motor Vehicle Dealers and Leasing Companies (PDF, 497KB) (PSTA)
Bulletin PST 117 - Motor Vehicle Dealer-Use and Manufacturer-Use Formulas (PDF, 302KB) (PSTA)
Bulletin PST 118 - Vehicle Services and Parts (PDF, 386KB) (PSTA)
Bulletin PST 135 - Multijurisdictional Vehicles (PDF, 456KB) (PSTA)
Bulletin PST 203 - Energy, Energy Conservation and the ICE Fund Tax (PDF, 324KB) (PSTA)
Bulletin PST 301 - Related Services (PDF, 462KB) (PSTA)
Bulletin PST 303 - Warranties, Service Contracts and Maintenance Agreements (PDF, 471KB) (PSTA)
Bulletin PST 308 - PST on Vehicles (PDF, 395KB) (PSTA)