Taxes suck. So does accounting, right? We got into this design gig so we could be creative, and often find ourselves buried in business administration stuff. Not always fun. We’ve had previous posts and events about taxation, but I thought I’d share a quick story with you all.
If any of you attended any of the past events where we discussed when to charge PST in BC, you’ll likely remember that beside the lesson that the Taxman eventually visits us all, there were two main pieces of wisdom to take home: hire a good accountant as soon as possible, and the safest route is to charge PST on EVERYTHING—regardless of what the latest tax bulletins say. Well, that is never more true for me or my design business than today as we were just audited again—the second time in under five years!
Four years ago, we were audited by the Consumer Taxation Branch of the BC Provincial Government. Weee, it was a fun couple weeks of confusion, shocking discoveries and arguments about tax bulletin interpretations and what was and was not “tangible personal property”. Like many, we believed that if our clients paid for production costs separately from design fees, that the fees were not PST taxable. Wrong. The reality is that all design fees that may eventually turn into anything tangible—even a CD, piece of paper or code on a server— is subject to PST. Oops. We had six years of invoices without PST on design fees. Uh-oh.
And then there was the issue of “self assessing” in those instances when you buy an asset from our out of province or download a font, photo or software from the Internet when no PST was charged. That’s not taxable, is it? Yup, it is. BC tax law quite clearly says we’re responsible for setting aside the PST amount and voluntarily submitting these. Even licensing fees for using a web-based service like blogging or time-tracking software that doesn’t even reside on your machines or even in the province is subject to PST. Fun, hey?
In the end, my company was assessed a large amount of back taxes, penalties and interest we were required to pay. A very large amount. The alternative was going bankrupt or, uh, jail for tax evasion I guess? And many of my friends and colleagues at other small design firms have had the same experience and all paid the Taxman handsomely. These kind of unexpected expenses can sink a small business with limited cash flow. Don’t get caught with your pants down, as “I didn’t know…” will get you nowhere.
This week my firm was audited again, but this time we were ready for them. Being audited twice is more common that I imagined as they do follow ups with companies after a few years to make sure they’re playing by the rules. This time, we were again dinged with a bill for back taxes for failing to “salf assess” on a few purchased items such as used computers! Thankfully, because we now charge PST for all design fees to all clients (except for obvious stuff like couriers and such that is only GST taxable) our sales taxes were spot on. In fact, our auditor even located some extra taxes we were charged by a vendor for COGS (Costs Of Good Sold) and the refund for those items will in fact offset the taxes, penalty and interest we owe this time. Ha ha! An audit with a nil balance. Eat that Mr. Taxman!
So again I say to my colleagues and designer friends running your own businesses: get your books in order, charge PST on all design fees—regardless of whether you’re coordinating production or not—and be aware that those items you buy from out of province or online are still subject to PST. It’s only a matter of time before the Taxman come calling. Be ready for him.
June 6th, 2007 at 9:55 pm
I see it’s time for another taxation round table. I’ll put out the calls.
April 19th, 2009 at 2:41 pm
Can anybody recommend a good accountant with experience in graphic design freelance/studio?
April 20th, 2009 at 11:12 am
The provincial gov’t runs regular (free) tax seminars where you can ask very specific questions about your industry.
If you can’t find your town listed in the drop down menu on this page:
https://www.sbr.gov.bc.ca/applications/Tax_seminars/index.asp
then email taxseminar@gov.bc.ca and request one be organized in your area.
April 20th, 2009 at 12:04 pm
Of note…
If your client pays for their printing/die cutting/paper/other tangible product, directly, then you do not charge PST on the design. If all you did was design for them and they paid for the production of the tangible goods, then you only charge them GST on your design fee. They pay the PST directly when they pay the printer/supplier for the tangible goods.
I know one freelance designer who has been in business for a decate and still doesn’t have a PST number because all his clients pay directly for their own printing and paper.
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A GOOD ACCOUNTANT
A good accountant I can recommend is Stage One Accounting in Vancouver. They do accounting primarily for creative professionals.