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BusinessNovember 21, 2017

Why does online shopping turn us all into rabid libertarians?

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Last week Labour announced that all online purchases would – finally – incur GST. Then, almost immediately, they backed the hell away. Duncan Greive explains why they were right first time.

Last week, Stuart Nash finally told New Zealand retailers what they’ve been wanting to hear for years: that this government would “absolutely” introduce GST on overseas purchases. “It gives a 15 per cent competitive advantage to [retailers] overseas,” he told Newstalk ZB. “While our retailers had to deal with GST, overseas people didn’t. It’s the right thing to do.”

Nash isn’t just some lowly backbencher; he’s the minister of revenue – what used to be known as the minister of inland revenue, aka the boss of the IRD. Thus, you would think, he’s someone whose statements on tax should be taken incredibly seriously.

Apparently not. While Nash is in charge of tax, the master of money is minister of finance Grant Robertson – and his authority supersedes Nash’s. “I think what the minister of revenue was saying was that there’s still quite a lot of work to do on it,” said Robertson, which is absolutely not what he was saying, but hey, that’s politics.

So the local retailers who were celebrating a big and unexpected win are now forced to wait at least three years, while the issue sits with the same mercurial tax working group who will decide whether we seriously, finally, actually this-time-for-real need the capital gains tax on housing that seemingly every tax working group in our history has said we need .

Translated, that’s another three years of Amazon, ASOS and Alibaba selling mostly tax free into New Zealand. Which might seem a great deal for New Zealand consumers, but is fundamentally a huge tax advantage to those who need it least. One we’ve endured way too long.

To understand why, consider a plain white t-shirt. It’s available from all three of those online retail giants, for prices ranging from NZ$1.90 (10 piece minimum order via Alibaba) to $136 for a pair of Armanis on ASOS. You can order them in under a minute, assuming you’re already registered, and a little over a minute if you aren’t. A few days later, they’ll arrive at your door.

Now, consider the same plain white tee bought from Kmart, The Warehouse or Superette. They range in price from $5 at Kmart to $109 at Superette. You can order them in under a minute, assuming you’re already registered, and a little over a minute if you aren’t. A few days later, they’ll arrive at your door.

So the experience for the consumer is essentially identical. Yet the revenue implications for this country are anything but. The tees from Amazon and co attract precisely zero tax in New Zealand – they slide from the giant tech company to your back with maybe a few cents chipped off from the courier on the way in.

Contrast that with the tees from the New Zealand-based competition. They attract GST and duty on the product itself. The staff handling them are employed here, and thus contribute PAYE. Assuming they’re profitable, all those businesses pay company tax. The same is likely true of the commercial spaces they lease, and of the courier companies used to transport the goods to you.

The international competition has several other advantages too. This includes utilising tax structuring that often means they pay very little tax anywhere in the world. It also includes access to venture or speculative capital which allows them to choose whether or not to earn a profit – the latter based on the notion that if they continue being very cheap and paying very little tax eventually there will be almost no local competition anywhere. At which point they will have a virtual monopoly and be able to use that and their enormous scale to make assumedly vast future profits.

The argument against applying GST is one that sounds superficially unimpeachable: that below a certain level it is more expensive to collect it that we gain by charging it. This is because to collect the sales tax we would pause our white tee at the border, send out a note and have a customs officer waiting with an eftpos machine somewhere near the airport to release it to you. This is a big hassle which sucks for the government (via it losing money on the transaction) and for the consumer (who would rather die than go to the airport if not getting on a plane or picking up a loved one).

The reason we don’t currently go that often to the airport is what’s known as the de minimis – the amount under which it’s deemed unprofitable to bother collecting the sales tax. That level varies around the world: it’s around NZ$1170 in the US, more like NZ$210 in Japan. Most countries are somewhere in between those large economies – with the notable exception of Canada, which has functioned on about NZ$23 for three decades now.

Here it’s $400, a level which allows us to import a lot of consumer goods tax free – including those white tees (in fact the level is lower for them, owing to their incurring duty – but don’t @ me, this story is complex enough as it is – and the above figures all slide under that reduced amount).

Local retailers have been screaming about this for years – Terry Cornelius, head of the retailers’ association, was warning of the impact on turnover and staff numbers in 2012 – yet politicians have long been fearful of being seen to impose a fresh tax on New Zealanders. It’s bizarre: National, the party of business, ignores that constituency’s pleas. Labour, the party of fairness and workers, abandons both. Each becomes a kind of techno-libertarian, caught in fear of disturbing the flow of online shopping addicts’ parcels.

Which is a pity. The three years we’ll likely be waiting for the tax working group’s findings to become law is a long time in retail – certainly enough to slide into receivership, as a number of long-established chains have lately. With each one goes jobs and tax revenue, which New Zealand needs to continue operating as a safe and functioning democracy.

The thing is, collecting that revenue is no longer the lose-lose equation it once was. Australia had one of the highest de minimis levels in the world at AU$1000. Their retail has been decimated by online shopping, and it has been a far bigger political issue there than here. From next year, though, that all changes.

What they decided is that anyone importing more than A$75,000 worth of goods a year must register with the government, and charge GST at the checkout. It’s very basic, and with modern software, comparatively simple to implement. Crucially, it avoids the expense of delaying packages at customs, and turns a net revenue loss into a gain. While online retailers might grumble, and writing the law might be complex, to access Australia’s 20m+ consumers, businesses will do whatever it takes.

We have precedent for similar action here. Two years ago, the government relatively quietly imposed what became known as the ‘Netflix tax’ on all incoming digital services transactions. It was expected to raise around $40 million in its first year. Instead, it brought in $113 million. The market for physical goods is much larger, and the split between local and international is thought to be edging closer to 50:50. 

The point is that we have so little idea how much is being avoided through these loopholes that we can be out by nearly a factor of three from our best learned guesses. If the not-insubstantial estimates of $200 million plus revenue foregone by our current de minimis turn out to be as wrong, that’s a very large chunk of new cash for us to spend on anything we like – including transitioning New Zealand through the turbulence of the digital economy, something Labour has campaigned on for years.

Rightly so: the storm isn’t just gathering, it’s here. Access to profit from our consumer base should be conceived of as a privilege, rather than a right. It’s one thing to operate at huge scale within a country while employing few people – or none at all, as appears to be the case with Amazon. It’s quite another to refuse to leave anything behind when you do.

The tax advantage enjoyed by multinational online-based corporations has existed for 20 years now. It has inadvertently provided an extraordinary, historically unprecedented headstart to these businesses. One which, truth be told, local retailers will find it incredibly difficult to run down. And, unlike tariffs of days gone by, this is not about protecting our local industry. It is, instead about, ensuring that where the experience is the same for the consumer that it also be the same for the retailer. Which seems pretty fair, right?

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