28 July 2000 GST/HST Interpretation 8358/HQR0001964 - Central Billing Allowances

Dear XXXXX:

This letter is in response to your e-mail and fax of August 30, 1999, to Robert Bowman, formerly of the General Operations Unit, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the central billing allowances received by XXXXX. I have been asked to respond to your inquiry.

Background Information

XXXXX is a cooperative and is a national buying group in the home furniture, appliance and electronics industry. It is owned and operated by a number of independent retail members. Its customers are independent retailers located across Canada.

Suppliers invoice XXXXX, although the products are shipped directly to the retailers located across Canada. XXXXX then invoices the retailers, and transactions between the retailers and XXXXX are recorded as sales on XXXXX financial statements. XXXXX records the central billing allowance (CBA) as a revenue source on its financial statements, rather than a reduction in its cost of goods sold. All profits, rebates and discounts are passed along to the participant members.

XXXXX advised the CCRA that they do not receive the CBA if the amount due to the supplier is not paid on time. In the half-dozen situations where they have not paid on time, the supplier claimed that XXXXX was not entitled to the CBA, or the early payment discount for that matter.

The agreement provided states that the supplier agrees to allow minimum discounts for "central billing" equal to 2.5%. This discount will be deducted at the time of payment based on the gross amount on the invoices, inclusive of the GST.

Interpretation Requested

You would like to confirm that the CBA would not be regarded as consideration for a taxable supply of services. As well, you have requested our opinion whether section 161 or subsection 232(2) of the Excise Tax Act (ETA) would apply to the CBA. Finally, you would like to know whether or not XXXXX would be entitled to a rebate under section 261 of the ETA in respect of amounts remitted to the CCRA relating to the CBA.

Interpretation Given

Based on our understanding of the arrangements between the parties, it is our view that the CBA is not consideration for a taxable supply of services. As such, we confirm the position put forth in the interpretation provided by the XXXXX XXXXX on October 16, 1997. It is our understanding that it is common in this industry for businesses to enter into group purchasing arrangements in order to enable members of the group to obtain the benefit of volume rebates and other such discounts offered by suppliers.

In our view, the CBA is not an early payment discount as contemplated under section 161 of the ETA. The CBA is separately identified in the agreement provided. We have not been provided with any documentation which would lead us to conclude that the CBA is, in substance, an "early payment discount". Based upon the wording of the agreement, the CBA would appear to have been negotiated, in light of the administrative benefits that the supplier receives by dealing with only one entity representing the buying groups members. The agreement provided does not appear to make any connection between the CBA and the early payment discount.

In discussions with XXXXX and XXXXX from XXXXX, they advised that the sample agreement provided is not entirely representative of what actually occurs in practice between the parties. Given that we have been provided with the same agreement on more than one occasion, and were asked to express an opinion on the CBA, this casts an element of uncertainty into the decision making process.

In regards to subsection 232(2) of the ETA, it is clear that any refund, adjustment, or credit of tax is discretionary on the part of a supplier. However, where tax is refunded, adjusted, or credited, subsection 232(2) of the ETA requires the issuance of a credit note (or a debit note by the recipient), before any net tax adjustment is required by the recipient.

In the case at hand, whether or not an optional refund, adjustment or credit of tax under subsection 232(2) of the ETA has been made is a question of fact. It could be argued that since the CBA is calculated based upon the gross invoice amount, including GST, it follows that the CBA includes tax. Alternatively, the other view is that, although the CBA is calculated using the gross invoice amount, the tax originally charged or collected was not actually refunded, adjusted, or credited. Given that no credit or debit notes were issued, there does appear to be some support for the view that tax has not been refunded, adjusted or credited by the supplier.

It would be an audit issue to determine whether or not the supplier in fact refunded, adjusted or credited tax to XXXXX, but failed to meet the disclosure requirements under subsection 232(2) of the ETA. In the meantime, it is accurate to state that XXXXX would not be required to make a net tax adjustment in accordance with paragraph 232(3)(c) of the ETA, since no debit or credit notes were issued in respect of the CBA's.

XXXXX advised that they have remitted amounts "on account of tax" in respect of the CBA's since it was their understanding that these allowances were consideration for a taxable supply. Since it is our position that the CBA would not be regarded as consideration for a taxable supply of services, no tax would have been payable in respect of the CBA. As such, no tax would have been collectible by XXXXX in respect of the CBA.

In conclusion, it is our view that the CBA is more in the nature of a subsequent reduction in consideration, rather than an early payment discount, and to the extent that XXXXX remitted amounts in respect of the CBA's to the CCRA and no debit or credit notes were issued, it would have remitted amounts in excess of the amounts it was required to remit. As such, it could file a rebate under section 261 of the ETA to recover amounts remitted in error. Should XXXXX be in a position to provide appropriate documentation to support their view that the CBA is more in the nature of an "early payment discount", we would be pleased to revisit this matter in the future.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-9699.

Yours truly,

Douglas Wood, CGA
A/Technical Analyst
General Operations Unit
Excise and GST/HST Rulings Directorate