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Benje Patterson looks at how taxes can be collected for online shipments from offshore retailers, and the difficulties that Customs will face in enforcing any policy change

Posted in Opinion
How can NZ collect all the tax due on goods shipped from overseas?

By Benje Patterson*

The surge in online retailing is causing a revolution in the retail sector, with retailers being forced to develop an adequate online presence for their business or risk being left by the wayside.

As is always the case with change, some are embracing it with gusto, while others are digging in their heels and complaining.

Although most retailers’ complaints are flimsy objections to increased competition, one justifiable concern is that purchases from overseas-based online retailers typically avoid GST.

This taxation loophole unfairly disadvantages domestic retailers by distorting consumer prices in a way that favours their overseas-based competitors. However, as you will soon see, designing policies to remove this distortion, and level the competitive playing field, is not an easy matter.

So how relevant is this issue of tax distortion for the retail industry?

Unfortunately it is difficult to get good estimates about the size of online retailing in New Zealand. With official statistics not yet adequately accounting for the sector, we are left with private reports and anecdotal snippets from courier companies noting rapid increases in deliveries of international parcels to residential addresses.

A widely-cited private study by PwC/Frost & Sullivan estimates that online shopping by New Zealanders will total NZ$3.2 bln in 2012, up 19% from a year earlier. Furthermore, with online retailing only accounting for 5.9% of total retail sales, much lower than countries like the US and the UK, there is significant room for expansion of the industry.

Of New Zealanders’ total annual online retail purchases in 2012, some NZ$1.1 bln is expected to go into the pockets of overseas-based retailers. A large proportion of this spending will be free of GST and tariff duties, as the New Zealand government has a policy of not collecting taxes on overseas purchases if the total tax payable is less than $60.

Effectively this means that, for goods which do not attract a duty (such as books and DVDs), someone can purchase up to $400 worth of goods without paying any GST. The limits for footwear and clothing is slightly lower ($226.42) because a 10% tariff, as well as GST, is imposed on these goods.

At first glance, it may seem odd that the government has chosen to impose a policy which allows overseas retailers to have a tax advantage over their domestic counterparts.

But the government’s stance was not an active decision to endorse such an unfair competitive environment – it was a practical response to ensure that taxes collected exceed collection costs.

Customs has presumably estimated that it costs $60 on average to investigate and collect taxes on an inbound delivery, so does not enforce collection for taxes owing below this price point.

However, changing policy to reduce this distortion, and level the competitive playing field, is not a simple matter. Policies must be designed in such a way that both reduces collection costs, and creates an incentive for consumers to pay taxation obligations before being chased.

To cost effectively collect taxes, Customs could follow a two-pronged approach.

One part of this approach would involve Customs entering into agreements with larger and trustworthy overseas-based retailers to collect taxes at the time of sale.

The other part of this approach would involve Customs creating some kind of web-based system where New Zealand consumers could pay taxes on purchases made from smaller retailers that had not entered into tax agreements. This second approach would also need to be accompanied by a fine for tax avoidance to ensure that consumers had an incentive to ‘voluntarily’ pay their taxes before being chased.

Foreign retailers who co-operate with NZ Customs

When negotiating agreements with larger overseas-based retailers, Customs would need to convince the retailers that it was in their interests to collect taxes on Customs’ behalf. This assurance could be given by pointing out that consumers would find purchasing from such retailers easier, as they could fulfil their taxation obligations at the point of sale, rather than by having to also visit the Customs’ website. Customers could also face shorter deliver times for purchases from these sources because, aside from biosecurity checks, Customs’ clearance could be more streamlined.

For purchases made from smaller retailers which had not entered into taxation agreements, Customs would need a system to ensure that consumers had fulfilled their taxation obligations. Such a system could involve Customs randomly opening a proportion of inbound packages (let’s assume 10%) and fining those consumers who had not voluntarily paid tax through an online system. As well as this fine, Customs could also impose a standard fixed fee to recoup the cost of collection.

All other foreign retailers

As an example of this second approach, consider the case where I have purchased a book for $100 from a small overseas-based online retailer and am deciding whether to voluntarily pay the $15 of GST owing on this purchase. To neutralise my incentive to avoid this tax, my potential fine would need to be set at $150.

This fine may seem hefty, but remember I have assumed there is only a 10% chance of getting caught by Customs, so my fine would equate to $15 in risk-adjusted terms (10% of $150). By designing the fining system in such a way, Customs would be seen to be ensuring compliance was in a neutral manner, rather than in a way which could simply be seen as a backhand way of generating additional revenue. 

With purchases from overseas-based online retailers increasing at a rapid rate, it is high time that the government rethinks its taxation strategies.

The government needs to look past the direct costs of collection and tax avoidance, and consider the unfair manner in which the current tax system favours foreign retailers.

Of course no system of collecting GST and tariffs on overseas purchases will be perfect, but the system described above is certainly a step up from what is currently in place.

--------------------------------------------------------------

Benje Patterson is an economist at Infometrics. You can contact him here »

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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30 Comments

I see, in my leetle Crystal

I see, in my leetle Crystal Ball, a surge, a Burgeoning even, of overseas Relatives and FacePlant Friends, sending Gifts.....who knew one had so many Californian long lost Uncles (the nice sort, obviously)?

You may get a someone in

You may get a someone in overseas to make the purchase first and then send to you as gift. What can the Customs do about that?

Or..... Set up  an account or

Or..... Set up  an account or three at Myus.com (and other places). And BE that uncle that sends random gifts.
 
Although Not sure how they are going to tax the ebooks.....

Haha Gibber - good business

Haha Gibber - good business idea in that little suggestion of yours.....randomuncle.com or randomaunty.com or auntlilliesgiftsforyou.com........or screwthegovofgst.com.......endless opportunity here.

They still can tax you on the

They still can tax you on the value of the gift.

regards

 

Why would you voluntarily pay

Why would you voluntarily pay gst on a $100 purchase? Are you suggesting a tax on all purchases from overseas?
Would progressive N.Z. based retailers who are in the e-retail space and exporting overseas then also be forced to charge GST on everything they ship offshore regardless of amount?
To be honest, I don't mind paying gst on purchases I receive from overseas that meet the current threshold. Its not always about the gst though. Convenience is a huge factor. And it's amazing how I could go to a local retailer and try and organise something they don't have in stock, yet if I'd just got online from home, could have the same item from say the U.K. to my door or desk at work QUICKER than the local retailer can organise. Cheaper is a bonus on top. And with regards product range, online really is where it's at.

While one of the key reasons

While one of the key reasons that people shop online from oversea may be
IT IS sold TOO EXPENSIVE IN NZ!
Rip-off deals are every where.

The easiest way around this

The easiest way around this problem is to get rid of GST !!!!!  

 

Solves the problem of inefficient Government and it's Agencies as well..now that's a real win win.

This reminds me of the Adidas

This reminds me of the Adidas Rugby World Cup jersey incident. Retailers are selling at almost twice the price you can buy online from overseas. I think we have greedy profiteering retailers that are out to squeeze all they can from the average Kiwi. 
 

Problem is the profit margins

Problem is the profit margins for the importers in NZ....I look at tools etc in the US and UK v NZ. The comparison is telling, typically the cost is <1/2 what we pay here. and often better quality as well  So is it the GST we are dodging or the crazy margins expected? 

Then of course NZ retailers are expected to pay rents on commercial property that is significantly above the amount considered par in the rest of the world....

Just who is getting ripped off here?

I find it interesting that some items in NZ are or were lower than global prices but now the NZ consumer is expected to pay the global price for cheese and fish, yet when consumers try and get global prices for other goods vested interests step in.

 

regards

 

Back up a bit Benje..answer

Back up a bit Benje..answer this first...how much munny taken from peasants by thieving govt is burned in the drive to steal even more from the people earning it..so the sods who steal it can claim they are managing the economy and running a good ship of state.

Then you can dive into the unintended consequences of insane levels of gst....one of which is to avoid the thieving whenever possible...

Or are we to face a future where fatheads raise the gst step by step arguing it is the only way to maintain the level of theft, given the level of avoidance....and rewarding themselves with bloated salaries and perks because they did such a great job.

 

 

Given the cost of freight,

Given the cost of freight, people buy from overseas for two reasons, it is still a compelling price regardless of freight or the selection available is compelling compared with here.

I actually think freight has killed a lot of opportunities given this is included in the $400 limit.

Most stuff that is coming in now is with people after their travels, it would be so easy to bring a few items extra, sell to friends and essence pay/ subsidies your travels.

Being fair on the NZ retailer, the margins are not that high here after holding costs, they just can't compete with the vast bulk buying the main retailers arrange in the US.

I stopped buying from Amazon

I stopped buying from Amazon and Barnes&Noble a few years ago, because the postage and freight kills it. Tried ordering 4 items at the one time, on the same order in an attempt to consolidate the freight costs. Order was accepted, but, because the shipping dates were different, each item was to be shipped on a different day, or from a different distribution centre. All shipped by sea. Took 6 weeks. Charged airfreight rates. All arrived in the one large sack. Go figure.

Have you tried out the ebooks

Have you tried out the ebooks from Amazon?

 

I read mine on my PC and android smartphone.

I an access all the ebooks via PC, android (or ipad.....If I owned one)  And the ebook version is considerably cheaper Vs hardcopy & Shipping.  With same day delivery.

 

I purchased a book from Amazon on Christmas day as my gift to myself. And was reading it within minutes of purchase.

 

I still like reading physical books.... But I'm afraid my days of purchasing hard copy  are done and dusted (unless it is for a gift.)

 

The charities in Sydney are now finding that all the second hand books they are getting are starting to be more trouble than they are worth... People are moving to ebooks...

Same here...the only reason I

Same here...the only reason I get a book from there now is if its the latest edition and NZ shops only have the obsolete one, or not at all.  If its not to obscure then I find I can save alot using NZ based on line stores.  Mostly now though google and youtube is my friend.

regards

 

I think the solution is quite

I think the solution is quite simple. All these transactions are electronic and IRD can just get the banks to collect the GST by adding 15% to anything that looks like a taxable purchase. Anyone who gets charged when they ought not can apply for the GST back.

 

Some things would slip through but could still be subject to penalties if the recipient does not get charged GST and fails to fess up. It would not be hard to come up with a system that caught 90% of transactions. It wont be long before there is a billion dollars of GST not collected every year if the current regime stays in place.

So how will that work if I am

So how will that work if I am a migrant worker who works in Australia and then has time with the family back in NZ - either as Fly In FLy Out (2 to 3 weeks at a time in AU and 2 to 3 weeks at a time in NZ)

 

If I purchase with my NZ bank account while I'm physically in Australia what are you going to do?

And if Australia tried the same thing, and I purchased from my Au bank account while physically in NZ what would you suggest?

 

There are quite a few Migrant workers out there.

Charge you the GST and you

Charge you the GST and you can get it back on application. It wont make much sense for you to buy things in Aussie Dollars from an NZ denominated account would it? You will get Forex commissions and a fee on each transaction.

So that would drive me to

So that would drive me to have my money in Australia for all purchases via Amazon etc.....

Then you would have to check at the border whether it was paid for out of a NZ account or an AU account. IF you assume it was caught by the banks catching the transaction then no need to check at the border...

 

You missed the point of migrant workers. They are liable to have accounts in both countries. In the case of Fly In / Fly out they would earn in AUD and be paid into an Au account. If they wanted to support their family in NZ, or themselves in NZ when they have their 3 weeks off, they would transfer some/most back to NZ..

 

Then it becomes a case of, if I want to buy from Amazon... Hmm, do I pay with my cash in my NZ account or my AU account...  And if I buy while I'm in AU do I get charged NZ GST or AU GST (10%)

The likes of Andrewj has mentioned previously that he has shuffled a fair chunk of his dosh into AU dollars. Whether that is in an AU based account or NZ I don't know. Then the likes of Gummy who troops around the Phillipines, Australia and NZ... Where does he have his accounts...  It would be trivial for either of those guys to spend their dosh from an offshore account...

Likewise a fair chunk of NZ migrant workers who Fly in / Fly out to the mines etc.

 

And I wouldn't be buying things in Aussie dollars from a NZ denominated account.

 

I would be buying things in US dollars from an AU or a NZ denominated account.  From China, US, or elsewhere....

As for the fee on each transaction.. Compared to 15% GST. That is trivial

Any collection of GST would

Any collection of GST would have to be based on electronic banking records.

Standard operating procedure for shipping to the UK, where the VAT level was very low, was to have a random number generator in the packing slip printing software which would generate a total price just under the VAT threshold.

It was the inconvenience factor for the customer,who had to go to the local Post Office to pay the VAT, rather than the VAT amount, that drove that.

If the banks were

If the banks were resp[onsible for the GST including paying penalties for any not collected I bet they would get every cent plus some to be on the safe side.

Would totally agree. Banks

Would totally agree. Banks were forced to comply with the Resident Withholding Tax on interest payments in NZ, but that is quite easy compared to sifting through every customer transaction which may, or may not be, an online purchase subject to GST.

I don't know what the answer is.

What I do know is, that there are millions of standard mail items crossing borders every day, let alone digital downloads, and a very limited number of customs officials to open parcels and take any action.

Not so much the banks but the

Not so much the banks but the CC companies....really simple, simply add GST on any foreign sale no matter what, hold the CC liable.  If its billed in NZ then there has to be a NZ registered company you can hold to account.

regards

So I put lunch in LA on my CC

So I put lunch in LA on my CC and get charged 15% gst. Yes you can tax anything however you forget about fairness. People push back if the tax system is not fair.

I would just take cash and be done with it, no gst at all.

I travel a lot and buy in essence all except basics overseas. My clothing cost is only a fraction of what it would cost here. It has been years since I purchased a gift/present for anyone that was not purchased overseas. On larger purchases at times the overal saving has been close to the cost of the trip. 

Hard to tax when it is sitting in a suitcase not wrapped. 

 

I think you also forget about

I think you also forget about other fairnesses.  Consider how much is un-taxed, though I tend to agree in your situation.  For instance if you are abroad keep the receipts and when you land back in NZ file a tax return for a refund, the idea is to catch the un-taxed, now whether thats a cost effective way is an other matter.  Also have you  considered that the US IRS will tax US citizens even if they are not in the USA? If you work in saudi its tax free, yet when you retire in NZ you expect a pension so I guess fairness is from whoms perspective.

regards

You cannot say I have

You cannot say I have forgotten about fairness when you raise issue subsequently on this thread which I have not responded to todate. I have a six figure income tax bill for starters in NZ, acc and gst here like everyone, simply trying to make what I have go as far as possible, like everyone. I know the US tax system and you can circumvent this provison with the right tax advisors so it is unfair in that respects. The pension provisons are a seperate issue, for me I expect to pay for BBs however will not receive it myself. That is bad enough let alone the sloppy legislation does allow others to come in and utilise it where they have not contributed. The Government does not see it as a priority to ammend that, very telling.

The idea to catch the untaxed has a flip side when has one paid enough? Personal freedom to make your own provison is the tradeoff. I actually think the  amount untaxed re internet purchases is relatively limited for the freight reasons noted before, however I note content is the growth area. The wealthly and upper-middle will get away with it in their suit cases as noted before. 

Where this conversation is heading is simply more tax. What gets me is everyone here seems fine with that.

 

NZ is a BIG rip-off. I

NZ is a BIG rip-off.

I regularly buy items from overseas, because even with freight and GST, it's still cheaper to buy overseas. Sometimes up to 50% less.

Think about that for a second.  How to get rich in NZ?  Become an importer.

 

 

However note that many US

However note that many US companies now wont ship directly to NZ. The Q is why? is it because of the risk ie CC loss? or are there agreements that the US wont bypass NZ importers?

Just look at the fat margins, bet its a stitch up.

Importer, well I think if trademe is any guide, there are lots of chinese importing lots of chinese crap, honesty we dont need any more.  Also look at warehouse, its tried to parallel import and it cant get the brands...it just imports chinese crap or occasionally gets a bunch of obsolete models.

Otherwise say look at the ps3 in the warehouse, DSE, EB games etc any NZ shop $100~$110...overseas shipped from say the UK $59NZ incl postage. I got a headset and saved over 1/3rd the price...PS3 games from UK way cheaper than here.

So yes, official importers are making money but its all fed back into head office coffers.....

and onine isnt always that good, take a look at say Rebel sports its more expensive to buy shoes as its the same shop price but you have to pay postage.  I do it because I get the odd sizes the shops dont hold  Try and find good brand shoes and make a decent saving, I have not yet.

One area though is maybe glasses, I intend to get a pair in a shop in the new year and then get a second on line.....I'll see how it goes.

regards

Steven,   try myus.com or

Steven,

 

try myus.com or similar. Set up to ship outside US when those pesky retailers won't sell to NZ based people.  You can even set up a US based Credit or Debit card to use at MYUS.com if the NZ CC companies ever have to deduct GST from NZ based CCs.

 

You might want to check out a post re buying glasses off the internet at

http://neuralnetwriter.cylo42.com/node/2617

Ive looked at such sites as

Ive looked at such sites as myus and the savings after their markup isnt that great, though maybe its because im buying items that dont work well.   Also Im actually tending to buy from the UK, its VAT free and they are far more willing to trade/send directly...far far easier.

Glasses, thanks I will get a second pair on line just to see.  My wife wont be happy but <$100 v $1000 is a huge saving....paypal as well...

regards