Taxing Overseas On-Line Purchases

The issue of whether or not sales tax – known in New Zealand as Goods and Services Tax (GST) – should apply to purchases overseas on-line purchases has hit the political radar. Articles from the New Zealand Herald addressing aspects of the debate may be seen here, here, here , here, here and here . Public responses to the proposal may be seen here.  

As fortune would have it I had the pleasure of assessing an excellent LLB  honours dissertation on this very topic. The dissertation referred to what the author referred to as a de minimis rule – that customs and IRD had set a figure on the value of transactions beneath $400.00 that would not attract GST. Transactions over $400 would attract GST. The basic reason for the de minimis figure is that the costs of collection exceed the tax collected providing a nil or negative return for the tax collector.

New Zealand retailers have been complaining for some time at the perceived difficulties that they face from off-shore on-line retailers. One argument that is advanced, as may be perceived from the articles referred to above, is that on-line transactions are more attractive because they are GST free (although in some cases the GST free component is cancelled out by shipping costs).

There are a number of issues that arise in this discussion. At the moment there appears to be an absence of publicity of hard evidence to support retailers’ claims. It would be helpful to the debate if that was made available. It would also be interesting to try and see what impact on-line sales within New Zealand are having upon “bricks and mortar” or “High Street” retailers. The playing field there is level in that both on-line and “High Street” retailers have to collect GST. There could be many other reasons apart from GST that would mean that the on-line retailer is more competitive than the “High Street” one. It would be interesting to see some evidence of these facets of the argument.

It may be seen from just that observation that the discussion is a very nuanced one, and the dissertation that I assessed dealt only with the legal and tax policy implications of the debate. I would urge the author, if he is reading this, to publish the dissertation either in a law journal or on-line, and I would welcome any comments that he wishes to make on this post.

I don’t presume to be an expert upon tax policy and the economics that surrounds it. But in this post, rather than engage or take a side in the debate, I should like to try and identify some of the issues that may need to be considered and that demonstrate that this is a nuanced and complex subject. I do this within a theme that has been present in many of my posts on this blog – the properties of the Digital Paradigm and how they must be considered in developing legal solutions in the Digital environment. I don’t express a view on the merits of either side nor should this post be interpreted in that way I try to identify some of the issues within the context of the Digital Paradigm

1. The New Paradigm

One of the qualities of the Digital Paradigm is continuing disruptive change. After the printing press had bedded in and society had become accustomed to the changes that the press enabled in the communication of information there was a time gap between the next information technology innovations such as telegraphy, the wireless and the radio. There was time to adapt – take a breath – reassess certainties. In an environment of continuing disruptive change that time for a pause – David Lange’s “cup of tea” – no longer exists. Retailers are facing doing business in a paradigm where the only certainty is uncertainty, unpredictability is the only thing that is predictable because change is a constant. I am sure that retailers are well aware of this. But it is a reality that must be faced.

One example of the way that change poses a challenge lies in the suggestion that if credit card transactions provide some sort of foundation for the applicability of GST to on-line transactions,  consumers will merely more to on-line payment facilities such as Paypal. Presumably a Paypal transaction will in some way mask the nature of transaction when it appears on the credit card. This demonstrates that the Digital Paradigm provides a number of alternatives to effecting the transaction which may add layers of difficulty to imposing a GST regime on on-line transactions, and this is an issue that would need to be addressed. And, of course, in an environment of continuing disruptive change, who is to say that other payment methods may not be in development or may already have been developed. Bitcoin is one example that comes to mind.

So the first issue will be to consider making any rule flexible and adaptable enough to apply to a constantly changing environment.

2. Consistency and Fairness of Application

Any tax regime must be applied consistently and fairly, and the less complex it is the better. One of the major changes in the New Zealand tax overhaul in the 1980’s was to rid the system of the myriad anomalies that clogged and complicated the tax system.

The Overseas Traveller

Let us take the following hypothetical example to demonstrate an inconsistent approach to the applicability of GST to on-line transactions. Assume that GST applies to all on-line transactions irrespective of value. I travel on business to confer with and advise a client in Hong Kong. Because this is a business trip the costs of travel and accommodation are tax deductible because I will pay tax and GST on the fee that I charge the client (assuming a normal charging regime based in New Zealand). I conclude my business and go for a walk. I pass a camera shop and see a remote wireless device for my camera. The price is $400.00. I purchase the item and return to New Zealand.  Taxes payable in Hong Kong (if any) are refunded to me at the Hong Kong International airport at Lantau prior to departure. I need not declare the item for it is for my personal use and is less than the $700.00 + that I am required to declare upon entering the country. I pay no GST.

The On-Line Purchaser

I go on-line and locate an on-line camera store operating from Hong Kong. I see they have a remote wireless device for my camera. The cost of the item is $400.00 including shipping to New Zealand. I order it. Upon arrival in New Zealand the customs department assess GST at 15% – $60.00. The total cost of the transaction therefore amounts to $460.00.

This demonstrates the inconsistency of approach to the purchase of the same item where the assessment for GST is dependent upon the method of the transaction. An across the counter purchase in Hong Kong attracts no GST. On on-line purchase does attract GST. It also demonstrates an inequality of treatment between the on-line purchaser and the overseas traveller.  In this regard I note that “High Street” retailers have not addressed the damage done to their businesses by travellers sourcing goods overseas.

Perhaps the solution may be to remove the exemption granted to travellers. In that way there would be consistency of approach.

3. Competition

“High Street” retailers claim that they cannot compete with the price of goods available on-line. This a highly complex area and has a large number of issues associated including the costs of a “brick and mortar” operation vs a server and a distribution system – essentially different retailing models. In some respects, the problems faced by “High Street” retailers hark back to the issue of doing business in an environment of continuing disruptive change. There is probably a small advantage in pricing for the on-line retailer and consumer when one factors in not only the absence of GST but also the additional shipping costs. And that argument may well be applicable when we are talking about apples and apples. The problem with the “unfair competition” argument is that often there is no competition between the “High Street” and on-line retailer. Let me give a couple of examples:

a) I like a particular brand of shirts and ties. I discovered the brand on a visit to the United States. The brand is available both in “High Street” outlets in the US and Australia. It is also available on-line through Macy’s website site. The brand is not stocked in New Zealand. Thus there is no competition between the “High Street” retailer in New Zealand and Macy’s On-Line because the New Zealand retailer is not standing in the market place with the item that I want. Essentially what the Internet enables is consumer choice. That is another aspect of the continuing disruptive change that the Digital Paradigm enables. The consumer is no longer limited to the choice provided by the retailer.

b) The on-line book store. I suppose Amazon is the most obvious example of the on-line retailer and because it began its business by selling books on-line, the discussion must turn to books. There can be no doubt that the book trade is suffering as a result of the challenges of the Digital Paradigm. I wonder if it may be a bit simplistic to say that retailers like Amazon have been responsible for the demise of Borders (both in NZ and the US) or the current troubles experienced by Barnes and Noble in the US. There are a number of challenges that booksellers face and not all of them will be resolved by imposing GST on on-line book purchases. The advent of the e-book and the proliferation of digital reading devices provide challenges in terms of availability and convenience that challenge the Print Paradigm itself. I use the term Print Paradigm to describe hard copy printed books because the only resemblance that E-Books have to printed works is that both employ text. Otherwise they are representatives of two entirely different paradigms.

This isn’t a discussion about the challenges faced by the printed book – that is a subject worthy of consideration all on its own – but it probably highlights the nature of continuing disruptive change within the Digital Paradigm.

Once again the issue of choice and whether there is actually a common market place between the High Street retailer and the on-line bookseller comes into focus. The on-line bookseller may be able to provide a title that is otherwise unavailable from the local High Street bookseller. The High Street bookseller can hardly complain of competitive unfairness if there is no competition. Only when the High Street bookseller is selling the same title that is available on-line can the issue of competitive unfairness be raised.

Thus, an issue that must be addressed and considered is whether or not there is in fact competitive unfairness in a marketplace where one player is not present.

The disadvantage in the on-line store is the lack of the shopping or retail therapy associated with considering and choosing, and the wonderful opportunity that the High Street retailer provides to browse and see the stuff you didn’t know about but that you find you wanted. Browsing the shelves of a bookstore beats browsing on Amazon – hands down.

4. Digital Products

The Digital Paradigm has introduced new digital products especially in the field of books, music and movies. If one were to impose GST regime on on-line purchases the assumed paradigm is that of a physical product coming across the border. The problem is that digital products are a stream of bits that come across the borderless Internet. The only time that territoriality becomes relevant is when the digital product is received on the purchaser’s computer.

Perhaps this demonstrates the disruptive nature of continuing change in the Digital Paradigm. The fundamental thinking behind the imposition of GST on on-line purchases assumes a physical package coming across the border. That is perhaps an assumption that derives from the pre-Digital paradigm and that may be obselete. One must be careful about fundamental assumptions in a time of continuing Paradigmatic Change.

The reality is that Digital Product purchases – e-books, movies, music, games and the like – are going to be impossible to track for the purposes of collecting GST. And this demonstrates issues of fairness and inconsistency that have been discussed above.

Clearly the issue of taxing on-line purchases of digital products is going to have to be addressed and the shift away from physcial sale of recorded music was considered at the recent Nethui.

5. Protectionism?

The final issue that occurs to me is whether or not the imposition of GST on all on-line purchases is a tax collection issue or a protectionist issue. The way the argument on behalf of the retailers is put forward in the news media is that a competitive advantage may be restored with the imposition of GST in that purchasers will be less inclined to go on-line shopping if they have to pay GST somewhere along the line.

I wonder if this argument is valid, because it seems to me that it ignores a number of the other factors that I have discussed above. The subtext of the argument seems to be that local retailers will benefit from the imposition of GST on on-line transactions and purchasers will return to the High Street market, deterred from on-line retailing by the imposition of tax. I may misunderstand the argument but it does seem that implicit in this approach is the use of GST as another form of trade tariff albeit at an individual consumer level, and I do not understand that to be the function of a transactions tax – as a deterrent to a particular type of consumption.

Certainly this is an issue that will have to be considered, and it may be that retailers may have to revisit this part of the arguement. It is an issue that I think will have to be addressed and resolved. What is the real purpose of the move – a fairer taxation system or protectionism for local retailers.

Conclusion

I don’t offer any solutions. That is not the function of this post. Rather it has been to identify some issues that may need to be considered to those who will participate in the debate.

But there is something else that this discussion emphasises. I have written on a number of occasions about the qualities of the Digital Paradigm and how these qualities challenge our assumptions about information, its use and its communication. In my view the various qualities of the new Digital Paradigm must be considered in any legal solution in which it is involved. That has been a constant theme in many of my posts on this blog and I hope that future posts will continue to develop that theme.

The IT Countrey Justice

14 July 2013

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2 thoughts on “Taxing Overseas On-Line Purchases

  1. I have two thoughts for you.
    1. Why should a purchaser in NZ pay “goods and services tax” to the NZ Government, when no entity in NZ has provided services, or goods. The only NZ service provided is delivery – for which the customer pays.
    2. Soon it will be possible to purchase a digital template of an object, which the consumer then uses to create the actual object on his own 3D Printer. There is no physical delivery (ignoring the actual 3D printer, and its raw materials). This is a similar example to the delivery of the e book. Why should this purchase incur GST ? (And, today it would not incur GST, even if it cost more than $400, because it is not physically delivered.)

  2. The author raises some interesting points, which reminded me of another industry bemoaning the Internet: the entertainment industry. Both the entertainment lobby and big retail emotionally contend that the government’s inadequate regulation of Internet transactions will mean death by a thousand price cuts. A common flaw in both parties logic, however, is the assumption that online activity is a substitution for offline transactions.

    First, as the author correctly notes, some items are not available in New Zealand. For example, I am not able to purchase certain sports accessories. New Zealand, of course, is too small for some companies to bother with. Secondly, in some cases the price of products in New Zealand far exceed that which is available offshore even after taking into account shipping, GST and other applicable duties. For these reasons, my money may not save Kiwi retailers even if GST could be collected efficiently.

    Can GST be collected efficiently? The ingenuity with which states have historically adapted their taxes over time suggests the answer is yes. However, the author provides a timely reminder that we are dealing with a different beast: the Digital Paradigm. Unfortunately, this a seldom discussed aspect of the GST on privately imported goods debate. But if the law is ever going to adequately regulate digital technologies, let alone tax them, it is critical that policy-makers properly understand the Digital Paradigm. It will be interesting to see if, over time, a sagacious view of law and technology trumps the emotional rhetoric.

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