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When burritos become sandwiches

In recent days we have heard how NZ First leader Winston Peters wants to take GST off some foods, but not others. While any reduction in the tax-burden should be welcomed, this picking and choosing of which items should include a sales tax causes unnecessary confusion for suppliers, retailers and consumers. 

Take the humble burrito. 

It’s a Mexican staple; a food that’s becoming increasingly popular in New Zealand. And in New York State there is significant debate (think tax lawyers and accountants) on the question of whether it counts as a sandwich for tax reasons.

When politicians pick and choose sale taxes willy-nilly there are often unforeseen circumstances. In New York this has meant that the eight percent “sandwich tax” has become applicable to burritos. It’s also led to numerous hours of government officials and tax experts debating the trivial point of just what constitutes a sandwich. 

At a cost of at least $3bn, removing GST on items of Mr Peters’ choosing is a big-ticket policy. But as with New York sandwiches, there would be endless regulations, descriptions and exemptions.

If politicians want to truly reduce the tax burden facing New Zealanders, they should start by cutting sales or income taxes across the board. Playing politics with your pantry is an expensive exercise that leads to some truly bizarre outcomes.

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The Herald on the iTax

This morning's NZ Herald covers an opinion poll it commissioned on public support for lowering the threshold GST is applicable to for purchases made on foreign websites:

A Herald-DigiPoll survey this month found that almost 55 per cent of the 750 New Zealanders polled had bought goods from foreign websites.Of those surveyed, 53 per cent said the $400 exemption should not be removed as the tax would be too inconvenient to collect.

Surprisingly, just under 40 per cent - 38.5% - agreed with the view of the Retailers Association that the 15 per cent GST should be applied to all overseas online purchases to level the playing field for local retailers.

We hope that the Revenue Minister Todd McClay's comments that he is awaiting further advice indicate that an economic approach, rather than an opinion poll, is used to determined whether "the tax would be too inconvenient to collect". 

Revenue Minister Todd McClay says the Government wants to see what other countries do first and a discussion document on the issue, due before Christmas, has been delayed until next year.

...

Mr McClay said he was unsurprised by the poll result and it reflected the competing interests of consumers and retailers.

While he has officials working on that and other issues related to taxing the digital economy, the minister said the issue would remain in the too-hard basket for the time being.

We're awaiting the Government's discussion paper. We are particularly interested to know whether:

  1. a lowered threshold will result in a net loss to the Crown - it would be mad to widen the GST tax base if the revenue received is less than the costs to collect;
  2. whether alternatives, such as reducing GST for New Zealanders (rather than taxing the rest of the world) are considered; and
  3. whether New Zealanders will be compensated with a lower rate of GST equivalent to the amount recovered by increase in the tax base.

We'll have to wait and see on these questions. In the meantime, comments such as the following from Labour's Revenue spokesperson are particularly unhelpful in a debate that is likely to be highly technical with tricky economic trade-offs:

Labour Party revenue spokesman David Clark said the Government "needs to explain to New Zealand businesses why they should be disadvantaged by having GST collected when overseas business don't face that challenge".

"It seems it would be pretty simple to speak with Amazon and other suppliers to ask them to collect GST since they collect, as I understand it, sales taxes for individual states in the US. If that's true, then it's obviously an ideological decision from the Government not to collect it."

How Mr Clark thinks that the New Zealand Government has any tax jurisdiction over companies operating in and domicile in the United States is unclear. Is he meaning that as Minister he would seek agreement from the large online retailers like Amazon to charge just New Zealanders more, and pass the money on to the government? If so, he is being optimistic. Amazon for example is challenging New York State's attempt to force it to collect its sales tax. Why would Amazon (and it's competitors) take any different view to New Zealand?

If Mr Clark thinks that some sort of cross-border legal obligation exists, he is wrong. Tax treaties seldom cover sales taxes.

In reality any further GST levied would be the responsibility of Customs at the border. The screening process is imprecise and carries high administration costs (both reasons for the existing threshold). For the consumer it means parcels/goods are held at the border until GST (and any applicable duty) is paid.  We're not yet convinced that retailers have made the case for an iPhone cover ordered from a US website to be stopped at the border in order for a few dollars of GST to be collected.

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