International e-commerce: the downsides for NZ retail and tax revenue
21 Mar 2013
Book retailers frequently suffer customers gloating over their savings on recent book purchases from overseas online retailers. But our tax revenue (GST that is not paid on those purchases) also suffers.
Most of those overseas purchases are for amounts lower than the current minimum levels for imposing GST on such individual imports, the first paper points out. So in effect, the government is losing revenue.
As are booksellers, other mall and main street stores, and even our local online retailers – all of whom pay GST collected from the consumer on every purchase.
It is a situation that Booksellers CEO Lincoln Gould says is inherently unfair, one that led him to commission the reports. “It is a discussion we need to have with government, and the principal reason for the papers is that we need authoritative information as a starting point.”
The issue of GST not paid on overseas purchases is “Potentially very important - the lost GST amounts to tens of millions, possibly even hundreds of millions,”
Says Norman Gemmell, Chair of Finance at Victoria University’s School of Accounting and Commercial Law, one of the reports’ co-authors.
Already the papers have been sent by Booksellers NZ to Bill English who has welcomed the input and read the two documents. They were presented at a seminar at Victoria University on Wednesday attended by over 70 people including Labour spokesman on Revenue, David Cunliffe. Read the Dominion Post's report.
Today Lincoln and the report writers will be briefing Inland Revenue on the study’s evidence on this increasingly important issue.
“At present, foreign retailers have an implicit 15 percent price advantage over comparable domestic retailers,” says Steel and co-authors Toby Daglish, Lisa Marriott, Norman Gemmell and Bronwyn Howell. This goes against the original 1985 policy decision to implement an all inclusive tax regime, they argue.
“By diverting domestic spending offshore, the Government not only misses out on GST revenue, but as demand for (buying) from domestic retailers falls, company and PAYE taxes are also reduced.”
The rise of online retail has also had significant consequences for our brick and mortar retailers, the report says. “… Many conventional retailers are unable to withstand the intense price competition leading to substantial business attrition.” They cite the exit of Marbecks from the CD retail market as one example.
To illustrate the problem, the report came up with this scenario:
Shane was in a rush. The meeting in Auckland was supposed to finish at 4:30pm, but had continued until 6pm. With his daughter, Harriet’s, 21st scheduled to begin at 8pm in Wellington he needed to get to the airport quickly. In his panic, he threw his gear into the waiting taxi – breaking his mobile phone’s screen.
The next morning he went to the local electronics store. Having spent half an hour with the salesman he settled on his chosen phone. As he went to pay his daughter called him over. Taking advantage of the store’s free wifi, Harriet had just discovered that the same phone was being sold by an Australian firm for $300 - $200 less than the local store. Shane immediately thanked the salesman, made an excuse, left the store and bought the phone online.
One Auckland bookseller regularly encounters this at another level. She has a customer who comes in and selects books, entering the ISBN and other information on his smartphone. He then replaces the books on the shelves and leaves the store!
Our retailers deserve a more level playing field, the team working on the study believe.
“All goods or services sold for consumption within New Zealand are subject to GST at a rate of 15%. As a model of simplicity, our GST regime is admired throughout the world. However, an enormous loop-hole has emerged. Any purchase made at an offshore retailer under the de minimis threshold is currently GST-free. Given the present state of e-Commerce, we believe that this loop-hole is now unjustifiable. In our view, the government’s policy is distortionary, provides adverse incentives and unnecessarily disadvantages domestic retailers to the detriment of society.”
E-commerce and its effect upon the Retail Industry and Government Revenue
No taxes or tariff duties are collected on overseas purchases if the total tax payable is less than $60. For most goods, this translates to a $400 de-minimus level.
If the goods attract a tariff, the limit is significantly lower. Most clothing, for example, incurs a tariff payment, but savvy online shoppers have learned to get around this by ‘costlessly’ splitting large purchases into smaller bundles, taking advantage of those websites with free shipping.
Books have a zero tariff rating.
One of the arguments for a high de-minimus level is said to be the enforcement costs of collecting tariffs and GST at the border. However their research has led the papers’ writers to believe “…It would be possible for the government to set the new limit below its enforcement costs.”
With an estimated spend by New Zealand consumers in 2012 at off shore online retailers of $3.19 billion, it would appear that imposing PAYE on these small imports would significantly raise GST revenue. And it would be a change that could revitalise our retail sector, the report says.
The second paper in the series provides background on ways in which regulations could be changed to ensure GST is paid on overseas merchandise ordered online. Together the papers cover not only why the change is needed, but how it could be implemented.
GST on individual imports is an issue of relevance not just to the book industry, but to all other retailers facing offshore competition.
Lead researcher, commerce/law student William Steel (pictured right), went into the study thinking that the current exceptions to tax collection on personal imports were acceptable, but as he did the research the facts he encountered changed his mind: “I now have a completely different view and believe this is an area which should attract tax.”
Lincoln Gould told the presentation seminar that “Booksellers NZ feel we have provided information on the materiality of the tax loss and the consequential effects on the economy of not collecting GST properly. Now we wish to say to Government that we have shown the size of the problem and have suggested worthwhile options for you to pursue in order to correct this major anomaly; it is now over to you now to take the necessary action. ”