COMMENTARY: Cannabis makes the case for sales tax-inclusive pricing
When cannabis became legal in October, you might have noticed it’s priced differently than most other products.
If you visit the Ontario Cannabis Store (OCS) website, for instance, you’ll see a range of products available from Rio Brave Pre-Roll to Sativa Oil. And when you add them to your cart and check out, there’s no added tax weighing you down as you pull out your credit card to pay.
What’s different about cannabis is that it’s priced on a tax-inclusive basis. This means that the price customers see for the products they choose is the price that they will pay.
While this is a common approach in European countries like England and Switzerland, why isn’t that the case with all products sold in Canada?
Currently, the price tag for anything from a winter jacket to snow tires doesn’t include provincial and federal taxes, ranging across the country from only a five per cent federal tax in Alberta to 15 per cent HST. You have to do some mental math or pull out your phone to calculate how much tax will be added to the product on top of the listed price. After all, if you’re in Ontario and spot a $299 winter jacket, calculating what 13 per cent is on top of that can be a challenging mental math exercise at times.
So why don’t retailers include the sales tax to reflect the tax inclusive pricing on the price tag for all items? That’s because the Excise Tax Act (ETA), which legislates the sales tax regime for goods and services in Canada, does not mandate retailers to reflect the tax inclusive pricing when selling products to customers, as is the case in many European countries.
Currently, only some products and services sold in Canada reflect the tax-inclusive pricing, such as gas, movie tickets — and cannabis. Cannabis is currently legislated under the Excise Act and the requirements state that all excise duty should be included in the final retail price that consumers see. It would take legislative changes to the ETA to mandate companies supplying taxable goods and services in Canada to reflect the tax inclusive pricing for products and services being sold.
Part of the reason for not legislating a tax inclusive policy for all products and services sold in Canada is that there are technically three different types of taxes that a vendor may have to choose from depending upon which province they sell in. For example, Alberta only has a five per cent federal Goods and Services Tax (GST), whereas Ontario has a 13 per cent Harmonized Sales Tax (HST). Although the HST has a provincial tax component, both the GST and HST are administered by the federal government. However, there are still a few provinces that have not harmonized their sales tax regimes and as such have to charge the federal five per cent GST and a provincial sales tax (PST).
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The current sales tax regime seems complex, but it’s not impossible to change it to go to a tax-inclusive pricing system. It would certainly require working with different levels of government specifically in the provinces that have a PST.
There are two main benefits for moving to a tax-inclusive pricing structure in Canada.
First, a tax-inclusive pricing structure may, in fact, curb individual spending if consumers see higher price tags on products. Marketers have been playing with our psyche for decades by utilizing pricing tricks like ticketing an item at $299 instead of $300. Marketers use these psychological pricing strategies because the subconscious human mind reacts more favourably to a lower priced item, even when it’s $299 compared to $300. If I saw a price tag of $337.87 (inclusive of 13 per cent HST rate in Ontario) instead of the non-tax inclusive price of $299 for the winter jacket, I may choose to not buy it.
Each day there is a new article or a new study that suggests that Canadians are operating at high levels of personal debt, some of which is due to frivolous spending. Earlier this year, the Bank of Canada compared household debt to disposable income of Canadians and found that on average, for every dollar of income earned, Canadians owe $1.70. So essentially the average Canadian is spending beyond his or her means. I believe a tax-inclusive pricing system will assist in curbing this current epidemic facing Canadians, as people will be better informed and more mindful of their spending seeing a bigger ticket price, inclusive of tax of course.
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Second, we are becoming a small global village, where people travel to different parts of the world much more frequently than they ever did in the past. With a tax-inclusive pricing regime, there is no room for anyone defrauding a person who is unfamiliar with the sales tax rates in effect in a particular region. And yes, we all have access to and the ability to do a quick Google search to find out the sales tax rates in effect in various regions, but there would certainly be lazy people (myself included!) who may choose not to do that, especially when in vacation mode.
Ultimately, beyond curbing spending and making it easier for tourists to pay exact amounts without being caught off-guard, a tax-inclusive pricing system is simplistic for consumers. And as Leonardo DaVinci said hundreds of years ago, simplicity is the ultimate sophistication.
Sonia Dhaliwal is an assistant professor of accounting and taxation in the department of management at the University of Guelph.
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