The new tax imposing GST on all online purchases of digital services is unenforceable and doesn't fully protect bricks-and-mortar retailers anyway, according to senior university tax law lecturer Mark Keating.
"Digital services" embrace electronic content purchased online, including downloaded music, video games, films, streaming services and software but Keating, of the University of Auckland Business School, says hopes all online retailers based overseas will pay the 15 per cent GST is, at best, "misplaced".
The tax, dubbed the 'Netflix tax', comes into effect on October 1 - a response to pressure built up over years regarding the failure to apply GST to online purchasers and the financial disadvantage that gave traditional retailers. The final straw came when New Zealand-based digital streaming providers like Lightbox had to pay GST while overseas-based competitors, most notably Netflix, would not - hence the new tax being known as the "Netflix tax".
The New Zealand Retailers Association estimates online sales account for 10 per cent of all retail sales with about 40 per cent of those purchases from overseas websites. They put the cost to Government through lost revenue from these sources at up to $200 million per year - with an estimated $40 million of that thought to relate to digital content, though the actual figure may be higher.
But Keating says the imposition of the tax is flawed and still does not protect traditional retailers from other goods remaining exempt from New Zealand GST.
In effect, the government is asking overseas retailers to register for GST, charge 15 per cent on all sales to New Zealand customers, collect that tax and pay it to Inland Revenue, he says.
"Some industrial-grade optimism must have been involved in the design of this tax. Remember, the FBI using all of its powers could not get Apple to unlock an iPhone owned by terrorists.
"It's doubtful Inland Revenue can compel online retailers to act as voluntary tax collectors for online sales made to New Zealanders," says Keating.
The new law requires retailers to consider factors such as the customer's IP address, the country where the customer's credit card is issued or any physical delivery address - but online transactions are notoriously difficult to monitor or enforce.
"What if customers use a VSP to disguise their location in New Zealand? Or if their credit cards are registered with a bank overseas - not to mention using Paypal, bitcoins and other untraceable crypto-currencies to pay for online goods?" Keating says.
"In a heavy-handed response, the Netflix tax potentially makes such practices by New Zealand online shoppers a criminal offence - although a significant grey area remains as to how such a crime will be detected, let alone proved."
The Netflix tax also carries heavy sanctions for overseas retailers who refuse to cooperate with Inland Revenue - even if it is recognised there is little it can do to enforce this.
"It is generally hoping the threat of action and bad publicity will compel most large online retailers to cooperate, to be seen as good and compliant tax citizens. Given the brazen tax reduction strategies adopted by many of the giant online retailers, such a hope may be misplaced."
Keating maintains only larger and more high-profile companies will comply: "Most retailers may simply ignore the new tax with impunity."
For compliance cost reasons, GST does not apply to imported goods worth less than $400 - the so-called "low-value threshold". However, the Netflix tax does not address "the growing problem" of whether to extend GST to other types of imported goods below the $400 threshold. These online purchases remain free of GST.
"So an e-book purchased on Amazon for $20 will be subject to an additional $3 of New Zealand GST, whereas a hard copy of the same book bought from Amazon will attract no GST," says Keating. "Likewise, downloading an album from Apple's i-Tunes store will attract GST but not if the CD itself is imported."
The problem is the sheer cost of collecting small amounts of GST on goods imported into New Zealand. There is no easy answer; no workable international model has solved the problem for New Zealand to follow.
The cost of imposing GST on low-value goods would exceed the small amount of GST collected. Such goods would need to be impounded and held until the customer came forward to pay the GST - requiring Inland Revenue to operate large storage warehouses and a sizeable staff.
"The cost of administration, storage, computer systems, postage and enforcement would be prohibitive; inconvenience for customers (i.e. voters) now used to GST-free purchase of on-line goods would be considerable," he says.
"That is why the Netflix tax applies only to digital services and why collection has been imposed on overseas retailers (even if some will simply neglect of refuse to comply) rather than Inland Revenue or the customers.
"But even partial compliance by some online retailers will generate some GST - and at least the Government has been seen to be 'doing something'."