How to Use NAV to Perform PST Self Assessment

One of the more obscure requirements found in many sales tax jurisdictions is PST self assessment.  In this post, we’ll look at this topic as it relates to British Columbia’s provincial sales tax (PST), although the same could apply to other jurisdictions where self-assessment is in effect.  This is an area that often causes confusion for business owners and their accountants, but fortunately for those using Dynamics NAV there are built-in features that can help streamline and automate the process.

The basic premise is that if a business purchases goods or services on which a sales tax would normally apply but which is not charged by the vendor, then the business is required to self-assess and remit the tax that should have been charged to the relevant government/tax authority (For more information on PST Self-Assessment in B.C. refer to point M.12).  This typically occurs when the purchase is made from an out-of-province vendor who does not have a business presence in the business’s province and is not registered to collect the tax themselves.

For example, if a business in B.C. bought a computer for $1,000 from a local vendor they would be charged 7% PST and 5% GST.  If they instead ordered the same computer from a vendor in Ontario, there would be a good chance that the vendor isn’t registered to collect B.C. PST and therefore would charge only 5% GST on the transaction.  However, the B.C. government still wants the tax revenue that would have been paid on that computer had it been purchased locally.  Businesses need to implement an effective internal process to deal with this requirement, something which is usually monitored and managed by accounting staff.  Dynamics NAV users have a few options to handle this which are outlined below.

The most straightforward approach would be to post a manual journal entry for the PST self-assessment, which is best to do at the same time that the invoice is posted so that it does not get missed.  From the example with the $1,000 computer, the journal entry would be a debit to the same account as the computer purchase and a credit to a PST payable account for $70:

Dr. Computer hardware                   $70

Cr. PST payable                                  $70

In my own experience in the past as an AP accountant, we would write out the journal entry on the face of the invoice along with the posted document/journal number to ensure a clear audit trail.  One small downside to this method is that there is no link within the accounting system between the original invoice and the journal entry, so it may not be ideal for businesses who are trying to move away from paper-based record keeping.

In NAV 5.0 SP1, Microsoft introduced new functionality in the North American version to address some of the issues users were encountering with sales taxes, including self-assessment.  There is some initial setup required in the various tax tables to get it to work, but once that is done it does a great job of automating the required entries.  To do this for B.C. PST self-assessment, the following setup is required. Please refer to my previous blog post for more information on the various NAV tax tables:

• Create a Tax Area code that contains a single Tax Jurisdiction for the Federal GST.

Create a Tax Area code that contains a single Tax Jurisdiction for the B.C. PST.

In the Tax Jurisdictions table, enter a G/L account in the ‘Reverse Charge (Purchases)’ field.  This is the G/L account that will be used for the credit side of the self-assessment entry for sales tax payable.  It can be either a unique account or the same one that is used for tax collected on sales (if applicable).

In a typical NAV scenario, when a purchase order is created, the Tax Area will default from either the Tax FastTab on the Company Information card or the Location card (if a Location code has been entered on the order).  So for the business in B.C., the Tax Area would initially be set as ‘BC’ and assuming the Tax Group on the line is ‘TAXABLE’ the system would calculate both 7% PST and 5% GST for it.  This can be seen by opening the Statistics window for the order.

If the order is placed with a vendor that does not charge PST then it must be excluded from what is payable to the vendor and self-assessed.  To do this once the setup above is completed, go to the Invoicing FastTab in the purchase order header and make the following changes:

• Change the Tax Area Code field from ‘BC’ to ‘CA’.
• Input ‘BC-SA’ in the field called Provincial Tax Area Code.

Note that if lines already exist on the purchase order, then any changes to these fields in the header will not be automatically passed to the lines and the same fields must be updated there as well.  NAV will alert the user of this with a warning message.

NAV may also pop up a warning message when a value is entered in the Provincial Tax Area Code field.

Once these fields are set, the taxes will be calculated and posted in the same manner as in Option 1, but with the added benefit that there is now a direct link between the self-assessment entry and the source document.  Unfortunately the Statistics window on the purchase order will not show the self-assessed portion of the tax, but navigating to the G/L entry after posting will confirm that it was done correctly.

The process outlined in Option 2 above can be automated even further by taking advantage of another feature that Microsoft added in NAV to the Vendor record – the Vendor Locations table.

The Vendor Locations table allows you to indicate whether a vendor has a business presence for a given Location code, including the default ‘blank’ location (i.e. the company’s address).  And if the vendor does not have a business presence there, then you can specify the alternate Tax Area code to use instead of the default from the Company Information or Location card.  NAV will automatically use this alternate Tax Area code plus whatever is entered in the Provincial Tax Area Code field on the Company Information or Location card to populate those fields on the purchase order header when that vendor is used, overriding the defaults.

To continue with the example from above, on the Company Information card, the Tax Area Code is set to ‘BC’ and the Provincial Tax Area Code is set to ‘BC-SA’.  For vendors located in B.C. who charge PST there is nothing else to do and when a purchase order is created the system will default the Tax Area to be ‘BC’ based on the Company Information card and the Provincial Tax Area Code is blank.  For a vendor located out-of-province, or who otherwise does not charge PST, an entry is created in the Vendor Locations table to specify that the alternate Tax Area code should be ‘CA’ for the blank Location Code.

With this entry in place, when the vendor is selected on a purchase order the system will automatically set the Tax Area and Provincial Tax Area fields that in Option 2 were set manually by the user.  This removes another manual step in the process, increasing efficiency and reducing the risk of error.  The only downside to this option is that for companies with a large list of active vendors it may take some extra time to review and update the records, but the improvements to tax and audit compliance that result make it definitely worth the effort.

For more information on managing sales taxes, check out how to configure Microsoft Dynamics NAV for the switch to PST in British Columbia.

You can also check out some of our other Accounting related content, such as our “Mastering the Month End Close”  Blog Series. This series includes:

• Mastering the Month End Close Process with NAV: The General Ledger
• Mastering the Month End Close Process with NAV: Accounts Payable and Receivable
• Mastering the Month End Close Process with NAV: Bank Reconciliation & Foreign Exchange
• Mastering the Month End Close Process with NAV: Fixed Assets and Inventory