Pat Pilcher: Online taxation, the bad, the worse and the ugly

Recent announcements that the government is investigating the feasibility of charging GST for online purchases from overseas caused a flurry of commentary. Could a tax for online purchases made offshore work? Is it even needed in the first place?

Although the first question mightn't be straightforward to answer, New Zealand retailers are arguing that taxing online purchases would help level the price gap between them and offshore competitors, while others less predisposed to paying yet another tax argue that an online shopping tax will effectively subsidise an already inefficient retail environment, perpetuating a New Zealand tax in the process.

It's also a pragmatic move for a cash-starved government now that an astonishing 54 per cent of New Zealand's adult population shop online, according to the latest findings from researchers Nielsen.

Not only are a sizeable chunk of us going online to shop, but we're also spending a fair amount of money too. Nielsen's research found that New Zealanders spent a whopping NZ$3.7 billion online over the last 12 months. Tapping into 12.5 per cent of that vast pile of money is a compelling argument no matter how you look at it - provided you're the government and on the receiving end of all that tax loot.

A New Zealand tax?

The term "New Zealand tax" may sound a little far-fetched, but a quick comparison of offshore and local pricing provides some pretty compelling proof that it probably does exist.

Take a 64GB Apple iPad Mini for example. At US retailer Best Buy it retails for US$529.99 (NZ$678.11). A quick check on pricespy.co.nz reveals a local sticker price of NZ$945 - that's not so much a price gap, but more of a price Grand Canyon. Sadly similar price disparities are also present when it comes to a whole range of other goods. Then there's variety, with many goods simply not available in New Zealand or worse still, only become available months after they've launched everywhere else.

So why are there such huge differences? NZ's small size and our distance from manufacturers are both frequently cited reasons. Another factor also figuring prominently is that many multinationals see the New Zealand market as a part of Australia, so goods destined for New Zealand retailers often end up passing through Australian warehouses, with any costs incurred along the way passed onto consumers.

With such large price differences in place, you don't need to be a genius to see why a growing number of Kiwis are going online and are looking overseas for a better deal.

This said, the iPad example is an extreme example and such big price gaps don't always exist for different products. There are also many hidden 'gotchas' that many have not fully accounted for. What can initially appear to be a bargain online can quickly become a far less attractive purchase once other hidden costs (such as commissions, currency handling fees, sales taxes, shipment costs etc.) are also factored into the mix.

Another consideration that isn't given a lot of thought but can be hugely significant are legal protections. Kiwi consumers are pretty well looked after in New Zealand by the Consumer Guarantees Act, yet it only covers goods purchased in New Zealand.

If you buy a dud online from overseas, it is pretty much up to you to negotiate with the offshore supplier (who has no obligation to co-operate) and the odds are that you'll be stung for the freight costs should you need to return it to the retailer (and possibly of its replacement to be shipped back to you).

What's in it for consumers?

Most of us are not huge fans of handing over a chunk of our hard-earned cash to the government, but we do it anyhow. Paying tax is a fact of life, and we do it simply because schools, hospitals, roads and society as we know it would simply stop working if we all refused to pay up (Not to mention that we'd be hauled into court for refusing to pay taxes).

Similarly the benefits of paying taxes on goods purchased online may not be readily apparent, but is potentially critical. For a start there is arguably a fairness angle. We already pay tax on anything we purchase locally, so local retailers are automatically disadvantaged when offshore retailers can offer the same goods tax free. Taking this into account the levelling effect of an online shopping tax makes sense - even if it means we'll end up paying more at the end of the day.

Taken to its logical extreme, if everyone started purchasing online and dropped local merchants, there would soon be some pretty dire social consequences. Retailers would soon close up shop. Our shopping malls and CBDs would soon empty out, transforming big chunks of our suburbs and downtowns into vacant spaces.

Retailers pulling out of the market could also have wider consequences. Impacts on the commercial property market aside, retail is a big employer in New Zealand. Many school leavers get their first jobs in retail. If the retail sector was to shrink because of a stampede to online shopping, a spike in unemployment would be probable as would a drain on the welfare system while the base of tax paying employees injecting money into the economy shrank.

This said, the assumption that online shopping is an unstoppable force that'll kill off bricks and mortar retailers is probably a little over simplistic.

While music, books, movies, games and other items with a low level of subjectivity hit the online shopping sweet-spot, many other goods such as clothing are less likely to be bought online as most people like to try them on first to ensure they get the right size and that they actually look good on.

There's also arguably a convenience angle. Instead of having to wait weeks for your goods to arrive via courier, buying locally also gives instant gratification and you get to take your purchases home as soon as you've bought them. Then there's the whole retail therapy thing. Going out and buying stuff can be a pleasurable experience that clicking a mouse simply can't replicate.

What's in it for businesses?

If being hit with yet another tax seems grim, the news doesn't get any better for business with customs, postal and freight operators, banks and credit card companies all likely to be hit with compliance requirements that'll probably also result in more tax funded bureaucratic bloat.

An online tax probably won't stop people from shopping online either. A tax may see struggling local retailers closing the gap between prices charged locally and what can be bought online from offshore, but price isn't the only factor driving people to shop online. A growing number of Kiwis who've moved back to New Zealand after an OE will continue to buy brands and products they've become attached to overseas that simply aren't available in New Zealand.

Then there's also timing. New Zealand is usually one of the last markets serviced when it comes to the release of Books, DVDs etc. Buying online from offshore retailers means immediate access, rather than a 6 month wait (and dozens of online plot spoilers), even if doing so commands a significant price premium.

Is it workable?

The pros and cons of an online shopping tax aside, the million dollar question is will it actually work? The short answer is both yes and no. A sizeable amount of online shoppers purchase online services, subscriptions, software and other intangible goods, and this could make gathering taxes a pretty tricky proposition as there will be nothing physical crossing our borders. Local payment companies who take a commission smaller than the governments tax take could also punch a loophole through an online tax and then there's also offshore credit cards and online currencies such as Bitcoin. Technology also adds yet another wrinkle to an increasingly complex situation.

If consumer inkjet and laser printer technology trends are anything to go by, it's probably fair to assume that the price of 3D printers is likely to plummet as their output capabilities become increasingly sophisticated. To this end the world's largest torrent tracker site, the PirateBay is already hosting 3D printer compatible models that can be downloaded and printed into physical goods. Taken to its logical extreme, taxing downloadable goods could prove to be an extremely difficult undertaking.

Taking a more cynical view, it is almost too easy to argue that taxing online shopping is little more than an opportunistic revenue grab by the government. A less negative view however does have one wondering if Government would have more success chasing revenues by going after those skilled in tax evasion.

Consider this: The IRD recently found that 107 out of 161 "high-wealth individuals" used sophisticated schemes in order to declare personal incomes under $70,000 so they paid very little tax in relation to how much money and/or assets they had squirreled away. Add in the number of companies who've also managed to pay minimal taxes and things start looking pretty crazy indeed.

Perhaps tightening up on the various tricks and techniques used by the wealthy and less ethical for tax avoidance may bring the Government more money than penalising ordinary New Zealanders seeking a better deal offshore.