Why tax Canadian-based video, but not Netflix? by Andrew Coyne
Apr 27, 2018
Source: The Province
In hindsight, the loony techno-evangelists behind the dot-com bubble of the late 1990s, the ones who told us we’d soon be buying everything online, weren’t wrong: just premature. Two decades later, online shopping is sweeping the planet.
Global e-commerce sales, including both “B2B” (business-to-business) and “B2C” (business-to-consumer), came to US$24.3 trillion in 2015; the figure is probably at least a third higher by now. Digital products — music, books, video and so on — are an increasing proportion of the total. And much of it is international: consumers can purchase directly from companies anywhere on Earth, as easily as they could from their neighbourhood shop — more easily, in fact.
In principle, standard economic policy would suggest governments should treat all with an even hand — online retailers the same as bricks-and-mortar stores; digital products the same as physical; foreign the same as domestic. And yet that is not the case in Canada.
Subscribe to a Canadian-based video or music streaming service, you pay federal and provincial sales tax. Subscribe to a foreign-based service like Netflix, you do not. Buy a book in a store, you are charged GST (though not, depending on the province, PST). Download the same book from, say, Google Play, you are not. Well, technically you’re supposed to assess the tax on yourself, and pay by a separate filing. You can guess how many people do that.
On the surface, then, it makes sense that Netflix, Google and other foreign-based digital service providers should be required to collect and remit sales taxes, as the Commons trade committee has just recommended. Exempting the online giants not only deprives governments of revenues, but skews the pitch against their domestic competitors.
This is not the same as the much-discussed, much-rejected idea of a “Netflix tax,” the notion that Netflix should be obliged to contribute to the upkeep of its competitors in the endlessly cosseted Canadian television industry via some special levy. Though advanced, again, in the name of the “level playing field,” this conveniently ignores, as University of Ottawa professor of internet law Michael Geist has pointed out, the many other bits of preferential treatment for which the domestic industry is eligible and Netflix is not: from simultaneous substitution to must-carry regulations to production subsidies.
By contrast, as I say, the idea that sales or value-added taxes should apply across the board, without exceptions, is standard economics: the sort of policy economists generally recommend and governments occasionally follow.
But. There are several buts, the largest of which is how such a policy would be enforced. We are not talking just of Netflix, after all, but potentially thousands of online providers, none of them with any presence on Canadian soil: no offices, stores, employees, or recoverable assets of any kind. If Canada has hesitated to require foreign-based services to collect the tax — and let’s be clear: this is about who collects the tax, not who pays it, which is you and me, friend — it may be because of the difficulty of applying Canadian law outside our borders.
Indeed, as Geist notes, even if the companies themselves were of a mind to comply, consumers might try to avoid the tax by giving a false address. Maybe the government could force offshore providers to supply it with the names and addresses of all of their subscribers; maybe it couldn’t. In any event, compliance costs would likely be high, relative to revenues — so much so, he argues, that some providers might decide to skip the Canadian market altogether.
The idea that sales or value-added taxes should apply across the board, without exceptions, is standard economics
It’s true that some countries — Australia, Japan, Switzerland — are beginning to apply their own sales taxes to foreign-based digital services, as Quebec has announced it will do, starting next year. It is also true that these will likely await broader international agreement on the “destination principle” (the idea that companies, no matter where based, should remit tax on the goods and services they supply in the countries where they are supplied) before they are effective.
If we are eventually to charge tax on foreign-based e-commerce, moreover, in the name of the “level playing field,” the same principle ought surely to apply to another measure: the so-called “de minimis” rule, or the amount that can be imported from abroad before taxes and duties kick in. At present, the threshold is set, absurdly, at $20, among the lowest of any country in the world; by comparison, an American can import $800 (US) duty-free.
Yet on this the trade committee, strangely, offered no recommendation. Certainly imported goods and services shouldn’t be taxed more lightly than their Canadian competitors. But neither should they — or Canadian consumers — be unfairly penalized.
Ah yes, consumers. Any proposal to apply a tax to something not previously taxed inevitably arouses opposition, no matter how unfair or inefficient the exception may be. The Conservative minority on the trade committee issued a dissenting report objecting to the imposition of “a new tax on Canadians who use online video streaming services like Netflix and YouTube” (though in power the Conservatives had openly discussed the same idea.)
And then there’s the little matter of the prime minister’s 2015 election promise that the Liberals would not bring in a “Netflix tax.” The promise has been repeated in various forms since then: “We’re not going to increase the cost of internet service … We’re not raising taxes on the middle class … (we’re) not going to raise taxes on consumers, who pay enough for their internet.”
Probably this was intended to mean the Liberals were against imposing a specific Canadian-content levy on Netflix, rather than the general principle of taxing like as like, digital or analog, foreign or domestic. But good luck explaining that.