Let’s start paying GST on everything

I paid no GST when I purchased Lorde’s Pure Heroine album from Apple’s NZ iTunes store in September, but I did pay GST when I purchased a MacBook Air from Apple’s NZ online store. And while I do pay tax when I rent or purchase movies from the US iTunes store, but that’s a US state’s sales tax, not GST.

I don’t get charged GST when I subscribe to offshore web-based products like MailChimp, SurveyMonkey or WSJ, but these monthly fees could easily creep up over the GST minimum of $400 per shipment or transaction.

Is this fair?

At the moment when we purchase any item in New Zealand we pay GST of 15%. It’s been lauded as one of the most efficient taxes around, and we are lucky to have it and to have kept it simple. But GST does not apply for purchases from offshore valued at under $400, and with the move to sale of virtual goods online that’s becoming a fairness and revenue problem for NZ. 

So it’s time for a review of how it all works, and Revenue minister Todd McClay is kicking it off with the launch of a discussion paper – soon.

The aim of any taxation system is to achieve the two very difficult goals of fairness and efficiency while collecting sufficient revenue for the government to do their job.

Fairness is making sure that everyone pays their fair share, as dictated by the policies of the day.  I don’t want to get into the argument on whether it is right or wrong to tax the rich or poor, but I do think it is important to make tax avoidance very difficult to do and expensive when caught. Efficiency is more important in many respects, and is the measure of the cost and time burden that results from paying and collecting tax. An efficiently collected tax is generally a simple tax.

My own ambition is that New Zealand sets the global standard for both the fairness (e.g. apply GST to Amazon ebook purchases from the USA) and the efficiency (make it trivially easy to pay GST) of our tax system. GST is one of the most efficient taxes around, and I’d hate to see it become complicated or to see onerous requirements or privacy issues result from poor implementation. 

Proposal 

One proposal is to simply remove the $400 minimum per shipment from the current system, so that GST will apply to every item, physical or virtual, that is purchased by someone in NZ. And then make it trivially easy to pay that GST. 

This could be supported by an annual “GST not charged” allowance for individuals (but not businesses) who purchase goods from offshore, and it may as well be $400 again. Thus if individuals purchase over $400 of non-GST-paid goods from offshore in any one year then they are liable for the GST. 

But how do we collect the tax efficiently? Currently Customs hold physical goods with a value over $400 until tax is paid. This is woefully inefficient in time and dollars, and it slows commerce, adds real expense on top of the tax and doesn’t work for virtual goods. Let’s not do this any more.

Instead let’s just capture the information about the physical goods as they arrive, send a bill to the customer, with system to accept payment. Let’s release the goods before the GST is paid so that we remove double handling and storage costs. I’ve written before about the Customs website for calculating duty as Step 1 of 10 for paying our tax more simply, and it would be nice to see them push this sort of change.

Once the law is changed to remove the threshold then we have the ability to chase the big sellers, and ask Amazon, Apple et al. to collect GST at the source for all transactions delivered here (based on IP address ideally). Like anything there will be some sort of 80/20 rule that applies, and the lions share of the tax will be collected this way. 

We can also place the burden on individuals to collate and pay tax on items they have purchased from offshore, provided the total is above the limit. The focus would at first be on making it easy for people who want to pay the tax to actually comply. Ideally the initial minimum would be quite high and it would drop over time as automation improves. Sure people could avoid the tax by using fake addresses or VPNs or whatever, but the burden is still on them to pay it and the conversation at audit time will be between them and the IRD.

What it means

The big change here will creating the burden for individuals of collating receipts and paying GST where it is not collected by the seller. (Businesses already do this). However the nice thing is that electronic purchases do create a lovely electronic track record, and tools such as bank online systems and Pocketsmith will help.  

But the easy parts are for businesses to start paying GST on everything, for Customs to release all goods before GST invoices are paid and for big foreign sellers to collect GST at source. Those simple moves will capture the lions share of the tax, and the IRD can take a soft line on individual compliance for lessor cases.

About Lance Wiggs

@lancewiggs
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7 Responses to Let’s start paying GST on everything

  1. Not radical enough. What about an 0.01% transaction tax on all financial transaction? All of the sudden we have a revenue stream from high speed traders and complicated tax dodges, and at the same time incentivise industry to remove such rule-bending complexity from their practices. I bet with such a revenue stream NZ could afford a much lower GST, but why not do the numbers and tell us?

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    • Lance Wiggs says:

      Numbers are easy for a Tobin tax – all significant financial transactions (the ones we are worried about) will take place offshore.

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    • Shear the sheep not the wolves Jonathan. Lance believes the consumer is an easier target to prey on, their international (actually all) transactions easier to control, hell just another layer of AML/KYC/CFT and it’ll be sweet, whatever the collection cost is.

      Financiers, the Roast Busters of the world, on the other hand will arrange things to “take place offshore,” apparently beyond the reach of merely sovereign regimes in way consumers are not.

      But if you wanted to be radical, how about the State spends some of the billions its about to waste updating the legacy fiat tax processing system on mining virtual currencies. They could require a certain level of pool contribution from, the usual suspects, citizens and service consumers. Maybe smelting aluminium isn’t the best use of power.

      In any case, I’m sure the Internet will continue to commoditise activities previously reserved for financial elites, tax havens, offshore banking, et al. And nothing squeals louder than a pig required to share its privilege.

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  2. kanuka says:

    Should Xero be charging all its customers worldwide the relevant VAT for their jurisdiction?

    What about UK-based companies with NZ offices?

    NZ companies with UK offices?

    Trying to match up a physical world with a virtual one is not as easy as it sounds.

    As evidenced by the amount of energy put into tax shenanigans globally.

    So if this was implemented, the small people would be forced to comply and the big ones would generally find a way around the rules.

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    • Lance Wiggs says:

      >Should Xero be charging all its customers worldwide the relevant VAT for their jurisdiction?
      Yes – if that’s the law of the and there and the local tax office makes it easy to pay.

      >What about UK-based companies with NZ offices?
      >NZ companies with UK offices?
      Charge the tax in the jurisdiction where it is purchased.

      >So if this was implemented, the small people would be forced to comply and the big ones would generally find a way around the rules.
      Which is a good point – the proposal is trying to tilt it the other way where the big ones have to comply first.

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      • kanuka says:

        Have you ever dealt with non-UK European tax entities to achieve even the most basic of things? The notion of “the local tax office makes it easy to pay” assumes a complete cultural change and IT transformation of these entities, neither of which are remotely likely. You know there’s a significant problem when you try and pay something and you have to push the proverbial uphill, right?

        Trying to tilt things so big entities (government, organisations, business) comply first will generate a colossal amount of push-back and result in all sorts of weird evasive behaviour (like changing jurisdiction, which business and organisations can do but little people can’t really do on a practical basis) but I suspect we’re talking at an über-high theoretical level here.

        In short, if it makes too much sense it will be routed around.

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      • kanuka says:

        > local tax office

        I made the distinction between UK and non-UK European countries because in my experience many non-UK countries are a step-change ahead of the UK (but not all, of course!).

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