GST and online sales

The Government has announced that it is currently investigating ways to ensure New Zealanders are charged GST on purchases they make online from foreign vendors. Netflix was one of the first companies to state that they do not intend on charging New Zealanders GST to use their service.

Just how the Government intends to levy GST on all online purchases is anyone’s guess. The devil will be in the detail.

The key question for taxpayers is whether this ‘itunes tax’ is about fairness, or revenue gathering. If the politicians are to be believed that this is purely about creating an equal play field, then there is no reason why the extra tax collected shouldn’t be used to lower New Zealanders’ tax burden in other areas.

It should come as little surprise that retailers in New Zealand are welcoming the announcement. Online purchases, especially of physical goods, have the ability to erode their market share, and with it taxes that the Government would otherwise receive. Any regime would also have to carefully look at the impact of compliance costs.

Yet on the other hand, the Government’s proposal seems fraught with difficulty, especially in relation to digital content. New Zealanders live in an increasingly globalised world. The internet allows the free flow of information, communication and access to content. And let's face it, IRD can't possibly reach every online retailer.

Two ISPs, Orcon and Slingshot, have lead the charge to open-up access by providing their customers with a way to access otherwise geo-blocked content. Certainly there are other ways for users to access international content, whether that be anonymity software such as Tor, or by using a VPN. When these workarounds are combined with virtual credit cards, like Entropay, users are free to consume content from wherever, whenever, in whatever jurisdiction has the best price.

The potential for a 15% increase in in the price of digital content may easily lead to an increase of people finding workarounds or increase the number of people engage in illegal file-sharing.

We look forward to scrutinising the proposal that the Government eventually releases, with a view to ensure that the Government offsets any increase in the tax take by reducing the tax burden elsewhere. 

Update:

Dr Eric Crampton from the New Zealand Initiative, has issued the following media release regarding the Government's announcement. Dr Crampton warns that the practicalities of implementing and such proposal would be fraught with difficulties and may even backfire on the New Zealand economy.

Online GST could backfire on economy

Wellington (20 March 2015): Applying GST on low-value imports could easily backfire and end up doing more harm than good for the economy, The New Zealand Initiative warned today.

Head of Research, economist Dr Eric Crampton said applying GST at the border only makes sense if there is a way of doing it that neither deters foreign retailers from shipping to New Zealand, nor imposes substantial hassles on Kiwis importing goods from abroad, nor proves too expensive to collect.

“A low threshold imposing a lot of hassle on consumers could easily do more to deter internet shopping than to encourage a level playing field,” noted Dr Crampton.

Worse, options for internet sales tax coordination with the OECD, suggested as a way of encouraging foreign retailers to collect tax for all participating countries, could harm New Zealand firms exporting directly to American consumers.

“America has thousands of different local sales taxes. A few years ago, the state of Wisconsin issued a 1,437 word memo on which ice-cream sandwiches are taxable. Exporting is already daunting enough for a lot of small New Zealand firms without having to navigate thousands of complicated tax regimes,” Dr Crampton continued.

“I am really not convinced that we do the country a service by entering into any deal requiring New Zealand firms to collect sales taxes on behalf of thousands of American taxing jurisdictions, each with different and complicated rules, in exchange for American firms remitting GST to the New Zealand government.”

“Even if an OECD-wide regime were restricted to national-level sales taxes, New Zealand firms exporting directly to Canadian consumers, for example, would have to deal with Canada’s overly complicated GST regime.” Dr Crampton concluded. “Levelling the playing field, when New Zealand’s GST regime is world-leading, risks subjecting Kiwi firms to rather worse conditions.”