To tax or not to tax online purchases
Black Friday and Cyber Monday are a great opportunity to save some money while getting a jump on that Christmas shopping. But when it comes to shopping online—something 76% of Canadian households do, according to Canada Post—the non-collection of sales taxes on purchases from retailers located outside the country is problematic for some.
Of course, consumers like getting even more of a break than they otherwise would. But our own online retailers and brick-and-mortar stores are placed at a disadvantage through a kind of unfair competition. Governments are also deprived, at first glance, of substantial revenues. What is to be done?
Currently, companies in other countries are not required by law to collect sales taxes and remit them to the Canada Revenue Agency and its provincial counterparts. And aside from certain large companies with a Canadian presence, like Amazon, they mostly don’t.
In such cases, Canadian consumers are actually expected to declare and pay the GST and provincial sales tax themselves. Unsurprisingly, very few of these “self-assessments” are made in practice.
Customs officers do have the mandate of filtering packages and applying sales taxes on products with a value of more than $20 when this has not been done by the retailer—as well as a punitive surtax of $9.95—but their resources are limited and they will never succeed in intercepting all packages. Moreover, customs officers are powerless when it comes to digital goods and online services.
Certain voices in Canada want foreign businesses to be required to collect our sales taxes directly. However, there’s no reason to believe that foreign governments will be particularly cooperative in doing so in the short to medium term.
It’s simply not in the interests of the tax authorities in one country to devote resources to policing millions of transactions for the benefit of tax collectors in another country. Nor is it realistic to think that the United States, for example, would zealously apply such measures when it refuses to adopt similar rules for its own internal trade.
Other voices propose that sales taxes be collected by credit card companies or banks. But this would necessitate the collaboration of foreign governments to provide a legal framework for these levies, which brings us right back to square one.
Moreover, introducing such measures would not necessarily be a good thing for the economy in general, nor for governments’ finances, since new taxes have the effect of reducing the real incomes of consumers and of depressing economic activity. Avoiding the payment of sales taxes is also obviously attractive to consumers, who thereby increase their real incomes.
Clearly, some kind of compromise is needed. One pragmatic solution, given the practical impossibility of collecting taxes when digital goods are purchased abroad, is for the federal and provincial governments to exempt such goods when they are sold by Canadian companies. This measure would put Canadian and foreign suppliers of digital goods on an equal footing.
A second compromise would be a reduced sales tax rate for all electronic commerce. In this way, local Internet retailers would be at less of a disadvantage compared to their foreign competition.
Like all compromises, this solution is not ideal, as it favours electronic commerce to the detriment of traditional retailing.
Given the difficulty of implementing international tax cooperation, however, these two solutions may be the most realistic ways of balancing the interests of consumers, retailers, and governments.
Mathieu Bédard est économiste à l'Institut économique de Montréal. Il signe ce texte à titre personnel.
Ce texte d'opinion a aussi été publié dans le Calgary Sun, le Ottawa Sun, le Edmonton Sun, le Winnipeg Sun et le Daily Herald-Tribune.